Transcription
The whole complexion has changed. The valuations haven't changed. Alongside that, we have a whole group of technology companies that historically were valued as being asset light and now they're capital intensive. For the first time, we are seeing cash being burnt and companies being compelled to come to the debt and equity markets to raise money. They didn't have to do that before. And then it's happening at a time when you're having some major lenders cap their redemptions.
Bull markets are an escalator going up in time and a bear market is an elevator going down. You know, historically going back the past century that about 3/4 of the previous bull market condition gets reversed in a bear market and it happens fairly quickly. The problems with bear markets is that if you're late, three-quarters of what you made in the previous bull market gets unwound. How's that going to make you feel?
All right, welcome to the Risk Reversal Podcast. I am Dan Nathan. I'm joined by one of my very good friends. He is somebody that I have uh been very honored to uh work with back in the day. Actually, probably worked for where I sat um on the trading desk uh at Merrill Lynch. um and I follow his work very closely and I've been very fortunate to have a front-row seat to it. That would be David Rosenberg. He's the president and founder of Rosenberg Research. David, welcome back to the podcast.
>> Thanks, Dan. It's uh great to be back. It's been it's been too long. I I thought that maybe I uh I had a runny nose last time I was on.
>> Now, you know what? You you know that, David. You know that you always have a mic here. And I think and I think this is going to be a little housekeeping. you're going to be in person hopefully not just to see your New York Yankees at some point in August which are a game and a half back and your Toronto Blue Jays and I'm just saying yours because you're fine you hail from that fine city are 10 games back but I think you know the Yanks maybe make a little run for it into the fall but more importantly in August you have a book coming out in digital form it's going to be in print in September and you know what we do when we have our good friends come on the podcast we will do a giveaway for up to a hundred free books books and all those people they got yeah they got to they got to basically leave a review on the goodreads and all that sort of stuff and Amazon and everything like that but tell us what's going on with the book what was the impetus and uh what give us the 411 here.
>> Sure. Well, uh I like the uh I like the freebie.
>> It it dovetails with my disinflation call uh which again is out of consensus. Look, I I was um for about as long as I can remember, especially after my time at Merrill And uh during the crisis uh friends, family, clients were asking me when when when was I going to write my book? You know, I started my business in January 2020 and it's uh 24/7. It's like I had my fourth kid. I just put up with so many questions and I thought, okay, I'm just going to I'm going to get it done. Took me a year to write it. What it's about, it's about how a bear survived so long in the bull ring. Uh and it's really a compendium of my 40 years of experience in the financial business and how that collective experience has uh shaped my views and conviction and my general philosophy uh till this very day. And a lot of it is talking about um, you know, the mistakes I've made uh and what I've learned from them. Uh, because the beauty about mistakes is that uh you learn not to do them again. You'll you'll make other mistakes. But that's why uh I really love this business in particular because it's so easy to uh to go off kilter and to be wrong for extended periods of time. Uh, so I talk a lot about um, you know, uh my whole background and uh the challenges I faced uh the victories when they happened and uh the lessons of never to you know, uh do a victory lap uh and also learning from the mistakes and uh I I sent the book out to some of my clients and some friends. Uh the publisher Southerntherland Books uh just loved it. Like I I did this the opposite. I didn't go to a publishing house first and market the idea. I wrote the book.
>> Uh and they just snapped it up. Uh, as is usual, you know, um the publisher keeps 90% of the proceeds. Uh I get 10%. But I didn't write the book to make money, but I run a publishing research house. That's how I make my living. Um, but all my proceeds uh are going to be going to my three most cherished uh charities.
>> Oh, wow.
>> Which is uh Crohn's & Colitis, Parkinson's, and Cancer.
>> Wow.
>> Um, so I didn't do this to to make money. Uh I did it uh kicking and screaming because I didn't really want to. But then uh it's one of those situations where you know um not if you build it they will come but everybody was just bugging me for too long to write the damn book. Uh so I read it and uh I hope people find it um something that's valuable uh because I do have some very unique experiences in my personal and professional life um and in the professional life that spanned both the sell side and the buy side. I worked at big banks including Merrill when we were out there together and uh I worked uh at a boutique mutual fund for 12 years. There's not many economists and strategists that have act have had both experiences what it's like to actually as somebody in my role as a prognosticator and an advice giver and a cog in the investment decision-making wheel to be sitting out every single day with portfolio managers and risk takers and being kitty-corner to the CIO of a company that was managing $6 billion of assets. That's that is an empowering experience. So, um and there's a quite a bit of humor in there. Uh my usual sardonic humor and sarcasm, so a lot of the personality uh shows through and um hoping it's going to be a success. I know that uh the publishing company hopes it's going to be a success. I didn't write it again for any other reason than um at some point uh you just say uncle when everybody's asking you for about 15 years to write write your book already.
>> Yeah. I I mean one of the things that's interesting about markets and and finance books in general is uh we get asked about them all the time. What are good reads? And some of the ones that read like textbooks are not great. and I think the ones that feel current and honest about, you know, um just different periods in the markets and how you saw things and what ended up shaking out. So, um to me, this seems like it's going to be one of those books. So, I'm really excited for when you get down to New York and you're promoting it and uh we will get it in front of our listeners um and our viewers. You got an ETF coming out that's going to be based on the research that you do, Global Macro. I know you can't talk a whole heck of about that, but when that launches, we'll we'll most certainly talk about that. And the other thing is, and I've said this to our viewers and our listeners in the past, I mean, your research product is just top-notch, and it's one of the first things that I read uh early mornings with Dave. So, uh you guys, we're going to put a link in the show notes. Um, there is a complimentary uh trial that you can have to get take a closer look at David's work and his whole team's work. So, um please check that out. I'm going to remind you guys again uh on the back side of this.
All right, David, got lots to talk about here. We're recording this on the last day of Q2. Um, Q2 was a bang up bang up quarter. I think it was the biggest quarter in the S&P. Um, biggest gain in uh I think it goes back to uh whatever the last bear market was or something like that on coming out of that. So let's talk a little bit about where you see the economy. Let's talk about where you see the disconnect in multiple different markets um across you know uh products if you will uh asset classes and how they're responding to this and you know I I know the calendar is not that important to you but how you see uh the second half shaking out and um, you know, we got to hit this AI thing. I think last time you were on you had um a lot of really interesting thoughts about that. I think the AI trade has narrowed quite a bit. Um, and I want to kind of just get your sense for that. But let's start with the economy because you have been in the camp about inflation and you've kind of been on the other side of what became consensus that we were going to have uh persistent inflation. And I I'm just curious where you are right now because I think some of the recent data suggests that it's heading in your direction. and despite some of the shocks that we've had over the last few years, whether it's just this recent energy shock and the like. So, where are you on the economy and how important is inflation and your view of it relative to consensus?
>> Well, let's tackle the inflation part first because uh you know, my my interpretation is different than most others. I guess that doesn't come as a big surprise to people, but you know, I keep on hearing and especially from folks at the Fed and uh previous Fed officials. We just heard the other day from Esther George, who used to run the Kansas City Fed, lamenting about how inflation's been above the Fed's target for so long. But, you know, consider all the repeated uh supply and you can even say demand side shocks that we've had over the course of the past six years. COVID turned out to be a major supply side inflationary shock uh with closing down the supply side of the economy almost everywhere. Global supply chains impaired uh that went on for several years in China uh which is at the epicenter of global supply chains. That was a recurring source of inflation. And then on top of that we had the government paying people not to work. So we had a labor shortage. Um, so the prices went into wages in 2021, 2022, and 2023. We had horrible government policy, uh, $2 trillion of fiscal stimulus in the form of checks on top of extended and enhanced unemployment insurance. And so we had inflation coming out of that. And just as that's starting to get resolved, we have Vladimir Putin invading Ukraine and that created a global energy shock. That was a big headache for at least a year. Uh and then of course we had this latest shock uh coming out of the US Iran war. Uh these multiple cost push inflation shocks. Of course we did have the demand side kick in from fiscal. I mean just consider that we've now had six years in a row of the deficit to GDP ratio in excess of 5%. Will you ever get a recession with that? Here we've had even under Donald Trump a Republican House and Senate with fiscal policy on steroids, a fiscal policy that's aimed to fight a recession that never came. I I mean, this is when you become almost immune or numb to what is going on and not even understanding the impetus that that's had for economic growth. We have never had six years in a row of deficit GDP ratios of over 5%. When I started in the business, we used to talk about the twin deficits in the mid-1980s. If you had a 2 to 3% deficit GDP ratio, that was horrible. Now we're running consistently. It's actually a miracle. It's a miracle that inflation is only running say call it 3 and a half% you know depending on what your metric is. I don't look at this at all as a situation that we're running some inflationary impulse. Inflation actually when you consider everything that's happened should be running a lot higher and it's not. You have to take a look at the counterfactual uh, you know, when people talk about well look at all the years where inflation was below target below 2%. We weren't witnessing these cost push shocks every couple of years. Now the way I come out of this is like this and I would pose the question to you. You asked about the economy. 90% of the economic growth in the United States in the past year has come from productivity. 90 10% has come from labor input. In a normal year, it's 50/50. And even when you came off of previous inflection points in the innovation curve and you can go back to electricity and go back to transistors and go back to microprocessing chips and go back to the mainframe and go to the internet. Even at the peaks of these shifts in the technology curve, the split between productivity and labor input is 60/40, 70/30. In a normal year, it's 50/50. Now it's 90/10. 90/10. So considering that productivity is kryptonite for secular inflation, that was the 1970s. Sclerosis and productivity and an emboldened unionized filled with cola clauses protected labor force. Where does that exist today? Productivity growth is 90% of the economy right now. And I'm supposed to buy into an inflationary view when I know historically that productivity is at the antithesis of an inflation cycle. I'm only hoping that Kevin Worsh gets this. Um I know that Alan Greenspan would have gotten it and he compares himself to Alan Greenspan, rest in peace, but I don't hear other Fed members talking about that. Uh you have a situation where unit labor costs which are productivity adjusted wages are running right now year-over-year to the first quarter 0.5%. Dan, a year ago they were 3%. You have almost no growth in unit labor costs which is the mother's milk for future inflation. So yes, we had you can call it a near-term inflation scare coming from oil coming from the strait of Hormuz and then whatever spillover effects you have. It's also affected and fertilizer obviously uh that feeds into food. The question becomes how sustainable is that environment and the one thing that I had noticed and remember the war didn't last that long and now you've seen oil prices almost totally retrace their run-up. Gold is down almost 30%. The CRB is down 13%. The US dollar is up 6%. You look at the base metals, they rolled over and you're wondering at this point, why are we still talking about inflation? The only people talk about inflation are people on the media and people at the Fed and the legion of bond bears out there because if you're an equity bull, the bond is always the enemy. But what's interesting is that you look at the 10-year break-even levels, the inflation break-evens from the TIPS market, they're 2.2%. 2%. They're lower now than they were before the war started. So, this run-up in market interest rates has mostly reflected the shift in the view on the Fed. We've gone from all of a sudden two rate cuts priced in uh to a rate hike being priced in in as early as September. And that's because has anything else changed? Has anything else changed in the economy, the labor market? No. It's because they're freaking out about inflation. And a lot of that is because they're still shamed from transitory and missing the inflation in 2021, 2022, and 2023. They miss that and there's still collective shame. Most of the people that were at the Fed then are still there now. Uh, not Kevin Worsh mind you, but most of the others. So I don't really have a compelling inflation story for you. I think structurally productivity is accounting for too much growth to really talk about uh inflation. Um, we came off uh this uh this war had an impact on commodities and on oil and now that's unwinding. I think in the next several months, people will be surprised at the string of negative CPI prints we're going to be seeing and how benign core is going to be and that's what matters for the Fed or the second round impacts and to tell you the truth there has been no significant spillover into core and nor has there been any spillover into wages which is why real incomes, real disposable incomes are basically flat over the course of the past year. There's no impetus in the wages or into core which is what makes this different than 2021 and 2022 when it filtered into core and when it filtered into wages and once it filters on the wages it's game over. It's tough to get the genie back in the bottle when it morphs into wages.
What are they expecting for non-farm payrolls uh number comes out this week. Okay. 3 on average hourly earnings. Does that concern you? Does that doesn't concern me? You weren't seeing 3s in 2021, 2022. You were seeing like 0.5, 6s, 7s because the labor market was tight and getting tighter and people were getting paid not to work. So the business sector had to pony up to bring people back into the workforce. That doesn't exist today. So no, I don't have a big inflation story for you. I have a big disinflation story for you. I cross my fingers that we don't get faced with another global uh cost push shock, but I don't see I don't see where uh the sustainability is going to come from. Apple just tried to raise its prices. They announced a price increase. Their stock got hammered that day. Uh the market's telling Apple, well, you know what, despite your cult and your big following that uh maybe this is going to affect the volumes of your business or maybe there's going to be a push back or maybe all your loyal followers will discover there's other competitors out there like Samsung. So, the thing is that um there is a big push back. I'll tell you one thing that will happen. The one thing that did affect the core when people talk about the core I mean airfares and delivery services are connected to the oil price but they're counted in core and they've just taken off literally and figuratively and that's going to come down a lot. That's going to come down a lot.
>> All right. But
>> I I think the surprise will be surprise will be
>> uh how extensive the disinflation momentum is going to be. Now, like I said before, market-based inflation expectations haven't budged. What's budged is the Fed's reaction function, and that's I think what's going to change. I don't think they're hiking rates like the market thinks.
>> Well, you know, the Apple example is a good one, David. Right. So, you know, that was last week when they made that announcement. This week they're lobbying the administration, okay, to buy memory from a Chinese company that is on the DoD's blacklist. Um, and so when you think about this, here's a company that saw, you know, when when memory prices collapsed in 2022 into 2023, they held prices firm. They took that margin, right? And now here they are, they're trying to defend their margins by raising prices that they're going to obviously pass through to consumers, but they're also trying to find, you know, cheaper memory. If they are able to get cheaper memory, they're not going to lower their prices, right? And when you look around the the example that you just gave as far as jet fuel and what that means for airlines, they are not going to lower their prices, right? And so I I mean to me if you just look around, everywhere I turn, I see prices much higher. Everywhere I turn, I just hear people, you know, in certain economic, you know, stratas just talking about this. So at some point does this come ingrained into like the psyche of consumers and and what what are you thinking about a consumer right now? Because you know you talk about the collapse in oil prices. You still see a gallon of gas at the pump near $4 and that is well above where it was in January and February this year that you know is 250 on its way to kind of 295 into the leadup of the war. So, I you know, I just wonder as far as consumer, a lower-end consumer is having a difficult time, but man, in in, you know, every time I hear from an higher-end consumer, and maybe we're just all whining, but it seems like prices remain a big issue here.
>> Well, the price level has been a major issue for the past six years, and I mean, since the onset of of COVID, prices have been a real thorn in the side of the consumer. But you see, inflation is not about the level of prices. It's about the rate of change. Inflation is a rate of change concept. When Paul Volcker took over 1979, and of course, he ended up crushing inflation by virtue of creating the conditions for back-to-back recessions. The price level didn't go down. He he couldn't he he wasn't that good that he could take oil prices which were around $40 when he took over back down to like three where they were in the early '70s. Not even Volcker could bring the oil price back down to where it was pre-embargo. But he took the rate of inflation down but the price level kept on going up throughout his entire uh seven-year tenure. Right? So you could have built the same argument back then. Oh well, prices just keep on going up. Well, um, yeah, prices tend to go up in a growing economy. Uh and uh the question is uh what is the rate of change and what is the certainty uncertainty? Uh so even in those periods when we talked about during the Ben Bernanke and the Janet Yellen and the Powell years of low inflation, well the rate of change was low but the price level kept on going up. So an answer to your question, it becomes this really. What is inflation to you? Is inflation is it the prices that businesses want to charge or is it the prices that consumers are willing to pay? And I guess we'll find out how even the loyal following and the planned obsolescence that worked for so long for Apple how that's going to play out because everybody has their price. Is inflation about the price you want to charge? I'm a businessman. I would love to charge higher prices but I know the pain point for my clients and I don't go past that. So, uh, inflation is a pretty complicated behavioral component of the economy. So, I'm not totally with you on that. When when when when oil prices rolled off the 2022 highs uh, with the initial after the initial shock of the Ukraine Russia war, the air the airlines cut their fares. The airlines will be cutting their fares. If you looked at the data that came out on last Friday and we got the May data on real consumer spending, real spending, volume traffic at the airlines is down like something like three in each of the past three months and down a lot. So you're telling me in the face of volume declines that the airlines are going to sacrifice their total profits by not at least partially reversing what they've done. I I don't I don't buy into that because it doesn't make any economic sense. On top of that, the consumer well uh, you know, we talk about how all the construction uh the the the AI uh data centers has been a huge influence on capital spending. You know, uh technology related capex is up double digits in real terms and it's down. The other half of capex is negative. Nobody talks about that. Nobody talks about that old economy capex is actually in a recession of its own. Commercial construction is in a recession of its own. But you see the thing about technology uh is that it always captures the imagination. And that's why the bubbles tend to be concentrated in technology whatever new form it takes on. And uh that's accounted for you know you can say more than half of the growth in the economy over the course of the past year. and that share is growing. The other half of the growth in the economy is coming from the drop in the personal savings rate which is the most important behavioral aggregate of the national accounts that decision amongst hundreds of millions of consumers. How much of my after-tax income am I going to put in the piggy bank and how much am I going to put into spending? You know, before COVID the savings rate was close to 8%. A year ago it was about 5%. Today it's three. Will it go negative? I mean, this is actually pretty bizarre. Going down two percentage points in one year. What's going on here? People are spending more and more of their after-tax income. Well, two things are going on. First, the high end is feeling emboldened. They're looking at the 401ks. They're looking at their brokerage accounts. And when you feel like you've developed all this wealth and that it's permanent, you're going to change your spending behavior. Because you got this pot of gold at the end of the rainbow. So why do I need to even save any of my current income? We may have a situation where the savings rate for the high-end consumer could be zero right now. But we know in aggregate it's 3%. So that's the equity wealth effect on spending. By the way, Dan, we saw this happen back in the late 1990s and we saw it back in 2006, 2007 when people were spending their housing wealth. Now, we have this other side of the equation which is the low-end consumer and for we know the savings rate there could be negative. They're living paycheck to paycheck. They are under extreme stress. They were under extreme stress before this inflation hookup. And what we've seen in the past several months is a dramatic reacceleration in credit card usage. What is going on here? 20% interest rate on a $1.3 trillion unpaid balance. Will it ever get paid? The delinquency rate is at a two-decade high of 15%, but still somehow the issuers are still giving the low-end household more credit cards to use up. And so borrowing is a source of cash flow that doesn't show up as income. So it's not counted on the savings rate. So the thing is that you know once your savings rate goes to zero and you start borrowing money on your plastic that goes into spending but you have no income. And that's the point I'm trying to make is that you know because we have become such a universe of narcissists that we measure the economy based on GDP which is spending. GDP is all about spending. Government spending, business spending, construction spending, and consumer spending, which is 70% of that pie. So, the consumer, and again, in real terms, is running over 2% year-over-year. And you'd say to me, hey, the overall scheme of things, that's not so bad. But nobody looks at the income ledger. That real disposable income growth, despite what everybody talks about as being a really red-hot labor market, real disposable income growth is running at 0% on the nose in the past year. Well, so you say, how is that possible? Well, because people are spending their equity market gains on one end, the high end, and people are tapping out their credit card lines on the other end, just to stay intact. But the income side of the household statement, financial statement, is running at zero. How sustainable is that? Uh, what happens if all of a sudden lending standards on credit cards start to tighten up? What happens if the stock market stops going up and people start to revise their pot of gold at the end of the rainbow? What happens if we mean revert, God forbid, mean revert the personal savings rate? It is a mean reverting classic Bob Farrell rule number one. It is a mean reverting series. We've gone from 8% pre-COVID to 3%. The past year 5% to 3%. That actually singularly is the biggest source of stimulus for the US economy that nobody talks about has been that decline in the savings rate. Now, when I talk about the savings rate to a layperson as an economist, uh first their eyes glaze over, then they fall asleep. But it is explaining what's going on here. When you're asking the question about the consumer, uh the income side of the financial statement is not good. The spending side is good. How are these going to mean revert? Because otherwise, if you were to tell me that the household sector, the consumer sector is going to be compelled to spend within their means, which is, by the way, how I was brought up. That shows up in the book, too, because it affects my philosophy till this day. Living within your means would mean that real consumer spending in the GDP data would be 0% right now, not two plus, and real GDP growth would be barely 1% and I don't think we'd be talking about some sort of economic boomlet, we would be talking about stall speed economy, 1 percentage point from where we are today is all it takes. So that explains where we are and uh the question will be to me the maybe the most important question to me is what does it take to mean revert the savings rate because people will be surprised if that happens that we could be in cons in a consumer recession that's going to catch a lot of people by surprise. Most pundits don't realize how precarious the situation is when a within the span of a year you have no growth in real after-tax income but consumer spending is still trending along north of 2%. I don't see that as being sustainable.
>> Okay. And and I guess the two things that to me, David, seem slightly at odds is just that what you see on the inflation front, I mean a lot of, you know, investors, pundits, strategists, they see that as a headwind, right, obviously to growth. So if you're thinking the other side, you think it's a bit of a tailwind. You think about, you just mentioned the dollar and the rally it's had, the DXY. It's still down, you know, about 7-8% right from year-ago levels. We have a 10-year yield that's just kind of stuck here, you know, at 4.4 but it is either side of that 7-8 basis points, right? And you see commodity prices coming in. Uh, there's no sign that the data center capex is going to let up anytime soon. and all of a sudden for the markets and maybe we'll just kind of shift over there a little bit. You can see plenty of tailwinds for the uh, you know, S&P 500, the NASDAQ obviously. Now I'm just kind of setting that up. I I it's not exactly where my head's at, but I'm having a hard time getting kind of my head around what are the things that kind of take the market back towards 7,000 in the S&P 500 right now. It would take obviously to your point about the consumer um, you know, looking less at the wealth effect and that's a higher-end consumer but a slowdown in the capex you know, data center build and so you know I I guess what I'm saying is we had that sort of sell-off you know earlier this year in March we had just a little bit of a five-six% sell-off in the S&P a bit more um in the NASDAQ we've come back um a bit so h how are you squaring the markets right here, you know, just kind of taking all of that in because let's just say we have a jobs print. Let's say the labor market over the last few months is suggesting some stabilization, that sort of thing. H how do you think about the stock market right here?
>> Okay. Well, well, before I talk get to the stock market, let me just go back to what you said about the labor market. You can't just take a look at the last one, two, or three numbers and then make the conclusion, well, we've stabilized. I I know that's what the folks at the Fed say. I know that's what you hear a lot from other Wall Street economists. The labor market doesn't gyrate. It's not the stock market. It it moves in a trend. It moves in a trend. It moves glacially and it doesn't collapse. It doesn't boom, but the trend is really important here. So well you have to take a look and especially because there's such a wide error term in non-farm payrolls in the first release that doesn't even get fully corrected in the third release which is why you get the benchmark revisions and look at the size of these benchmark revisions and then you go back and you say well employment was not nearly as strong as it was 12 to 18 months ago but at that point nobody cares anymore but all the traders are trading around that notion that things are fine and then the numbers get revised sharply lower most of the time in the past year the non-farm payroll numbers by the time you get the third estimate were lower than they were at the first estimate and uh you're kicking yourself because you actually got the call right but the BLS doesn't release the revised number in the first go-round. You have to wait two more months for that to happen. Let me just tell you that on a year-over-year basis the non-farm payrolls are running flat. They're running flat. And actually, the employment of the household survey to the decimal place is running minus .3%. That's the year-over-year trend. So, no, it's not useful. I anybody who was an expert on the labor market would tell you you can't look at month-to-month gyrations. I guess people like to do that on Wall Street because they're trading the data. And the Fed has actually become a collection of of trader-like mentality. The broad trend in employment in the United States just like the broad trend in real after-tax income is running zero and that trend is continuing despite the monthly gyrations. Now people think unemployment rate 4.3%. But it's only 4.3% because of the drop in the labor force participation rate which if it hadn't gone down as it has in the past year the unemployment rate that we look at would be at 5.1 ergo there's actually more slack in the labor market than meets the eye. So when people come to me and they say well you know you're a disinflationist and inflation going down is going to be conducive for better consumer spending. Well, that all depends on what nominal wages do. And nominal wage growth is cooling off. All people look at is the unemployment rate. It's a lagging indicator. They look at employment without looking at what the broad trend is. And it's a race between what nominal wages do and what inflation does. And my sense is that wages are going to cool off more than the inflation, which means that real wages are still going to be very constrained at a time where the savings rate is at a precariously depleted level. So no, I really don't have a particularly constructive view of the consumer. Now, you want to talk about the first half of the year. Well, what happened? what happened where they stepped up income tax refunds once again and they worked and it's the one thing that we did know coming out of COVID with those stimulus checks people will spend all of it today's consumer will spend all of it and save none of it so when you actually look at the data which we got last Friday on the consumer you can see that the tax bill for the consumer sector broadly speaking January to May was down $50 billion. All that money got spent. $50 billion is not exactly chum change, but that's all in the rearview mirror now. And that gave the consumer some extra uh some extra to spend. Thank you, Donald Trump and the Republicans. And of course, it just means a further consternation when it comes to the fiscal front uh that we have to continue with these gimmicks. However, that helps explain again why the consumer hung on, but that's actually already uh in the rearview mirror. You're not going to capitalize on that uh in the future. As far as the stock market's concerned, look, you know, I take a very eclectic approach uh to the stock market. I highlight that again as I plug my book. But you have to just like you are, we talked about this before before the show, you have to take a balanced eclectic approach. So what is it that I look at? Uh I look at the fundamentals obviously whether it's earnings revision ratios, actual earnings growth, margins, you take a look at the fundamentals, you take a look at valuations, you take a look at sentiment, you take a look at technicals, you take a look at fund flows and market positioning. And at any given moment in time, one is dominating the other. And I also have to say price momentum is very important as well. There's like six things, six ingredients. So, what are we going to talk about here? Price momentum is very strong. The technical picture is is is mixed to okay. You could argue that uh, you know, earnings are obviously hanging in in the aggregate but let's keep in mind that, you know, you talk about the stock market it's become so concentrated uh that, you know, when you take a look at the national account numbers 90% of the earnings growth in the past year, 90 has come from tech and the tech sector, tech and telecom and 70% of the expansion in the market cap in the past year has come from those two sectors but look at they're they're part of the stock market but then again, you know, we have this situation where the concentration of the top 10 stocks and the concentration of tech and telecom in the S&P is higher now than it was at the bubble peak back in the late 1990s. So, the things that really concern me is the concentration level, the valuations, the fact that everybody is all in, the fact that everybody is all in. You know, I saw my friend Michael Wilson, he's going to come on my webcast soon. Uh, a former he we used to be called perma bears together. I don't think we were ever perma bears, but you know, he was bearish for a long time. I saw I saw him on CNBC this morning and he sounded pretty darn bullish. There are no bears left. There are no bears left. You know, you take a look at portfolio managers, their cash ratios are down to 1%. You look at household balance sheets in the United States, 73% of the financial asset mixes and equities. Only 9% are in not even 7% are in bonds. Do you know that? But then again, who are you really going to go to your neighbor's cocktail party and talk to people about that you just loaded up on two-year Treasury notes? Like, don't you want to make friends? You don't want people to walk away from you. Uh, bonds aren't sexy. Equities are sexy, especially what's been driving. And if it's not the hyperscalers one day, it's, you know, semiconductors the next day. Um, so there's been rotation even with the uh, the high-tech trade. And so this is what we have in our hands. We have a very uh, you know, strong momentum, strong price momentum. And I would say that you look at the broad earnings picture, it's been fine. There's there's positive out there. You can't ignore the positives. But I am nervous about the herd mentality and I always am. I'm a natural born contrarian. And I guess I read uh Thomas Malthus's classic from the 1700s on herd mentality that was that helped shape me uh for till this day, the madness of crowds. That's what unnerves me the most because we saw this in the late 1990s. When you get a negative equity risk premium, it's the market's way of telling you that equity is no longer a risky asset class. They have become part of the riskless asset class. So I'm not going to deny the fact that earnings are strong uh uh as concentrated as they may be. We're talking about the overall market. So earnings are strong. So the fundamentals sure uh, you know, we have uh strong price momentum. I had Katie Stockton on my call yesterday and she's very constructive on the technical picture. That's her craft. You know, I'm an interested observer but I am nervous that um that everybody is all in at the same time. Undue concentration, household balance sheets. Nobody's taking profits. Everybody is all bullish at the same time. Portfolio managers at 1% cash. God forbid if we ever have a redemption event. Imagine if whatever happens, imagine if that happens in equities. What's happening in in private credit right now? And now you see this is the other thing is that the credit market, this one thing we didn't mention, right? Is that and you know this too, credit always leads. Credit always leads the equity bark. And sometimes by a year. Look what happened that the problems in mortgage credit were happening probably 10 months before the S&P 500 figured out and peaked back in October of 2007. Well, look what's happening right now in terms of quality spreads in the uh non-investment grade space. Take a look at what's happened to double B spreads. They have widened out dramatically. And that's usually a canary in the coal mine. And when I start seeing, you know, private credit one company after another gating their funds, capping redemptions at a time of really this general exuberance and the risk-on trade, the overwhelming consensus, it raises my uh my contrarian antenna. Well, you know, what more can I say? So, I'd say there are two a couple of things that are really supporting price momentum, and you can't deny that. Um, the psychology, you can't deny that. And earnings, uh, the technical picture, you can put those aside and say, "Yes, those are all good." But there, you know, if you can't see the other side of the picture, if you're just this unabashed bull and unless you have the luxury of being young enough to say, "I can hold on to the S&P 500 for 40 years." If you can, that's great. I don't have 40 years. You probably do because of all the weight you lost. But anyway, it's a matter of um, and we talked about this earlier that, you know, I'm viewed as a perma bear, yet in my model portfolio which was really the genesis for this ETF uh that hopefully will get launched soon. I'm probably 50% equities.
>> Yeah.
>> This you know I have I've never shorted a stock in my life. But it's it's it's it's sector specific and it's regional specific. So what I missed in the US I more than made up for in Asia which we are actually very bullish on.
>> Yeah. And and you've been detailing that. you've been very generous coming on every quarter just like Mike Wilson by the way and I think a lot of our listeners um have a sense for the nuance and I think that's what's really important. I think that's what I'm really uh looking forward to also in your book because I'm sure that is a theme. Let's talk about the concentration. I know that this has been talked kind of to death. The comparisons between, you know, '99 and 2000 and what we've seen here, the comparisons of what you just kind of mentioned, what was leading uh in in the credit markets that you saw back in '06 uh into '07. And I remember you were detailing that it seemed like obviously on a daily basis when you were at Merrill and you know like I think one of the things that you got tagged with is that you were too early. So that period between '06 and '07 where you don't even but you laid out you laid it out and I think that's what's most important. But you and I don't measure from an economist and a strategist if you were early it's not like to your point that you were shorting the market. You're not Michael Bur you know that sort of thing. you're basically kind of giving what you thought was a playbook for how things will play out. And I think that's what is most useful uh in a relationship like yours with your clients um over multiple decades. Let let's just talk about you just mentioned you know this Mag Seven as soon as in Carter Braxton Worth, you know, we have uh the benefit of him coming on our pods weekly and you know he has this mantra that as soon as you start seeing names for groups of stocks or or slogans like higher for longer, you know, those sorts of things it's probably close to being up, right? And so now all of a sudden they're calling the Mag Seven the Lag Seven. Okay? And I think that is something that's worth it. It's notable. I I think if you own uh, you know, tech stocks, you've seen what happens or what has happened uh to the hyperscalers. All of them are lagging the market. Uh most of them uh not most of them but until recently most of them were down on the year and that rotation that you've been highlighting within
Technology has been real. If you look at the market cap gains, uh, in memory and storage and then second-tier, um, sort of semiconductors, ones that were kind of left out of the trade in '23, '24. Then you have, this is fascinating. You have GLW. This is Corning. This was the poster child, or one of the poster children, of the dot-com bubble. That stock is up 700%, you know, in the last, call it 13, 14 months or something like that. Today, as we're looking at my screens, you know, that is up. It was up 10% or 15% yesterday. It's up 5% today. You know, I look at the socks, it's up 100% in the year. That's all come since April or mid-April. So it's undoubtedly a bubble in storage and memory and many semiconductors and then ancillary sort of names. How are you thinking about this? Because I could sit here and scream from the rooftops for another year and these things might double again, you know, that sort of thing. It's so obviously a bubble. It's so obviously the death rattle for this trade. And if there is a moment of, uh, you know, I don't know, rethinking this capex boom, because like Microsoft's a great example. It's down 35% from its high as of a year ago, and they keep raising their capex 50% a year. It's eating up all of their cash flow. This is a company that's competing with Google, with Amazon. You know, Oracle just joined the party. The Chinese, that's really the big problem. I think that's one of the big reasons why the hyperscalers have rolled with their, um, you know, I guess their open-source models and their ability to push it out to the world. So I know that was a lot there, but help me think about the concentration, help me think about the spend, help me think about what I think is very obviously a bubble that has burst in certain parts of the tech trade, but there's just full-on right now in many others.
Hm. Well, look, if you go back to that period, uh, the NASDAQ peaked in March of, uh, 2000, but a lot of the sectors, uh, that were non-tech and a lot of the value plays, it took, probably maybe eight or nine months before they started to roll over. I mean, the NASDAQ peaked in March, and I think the S&P peaked sometime around September. I guess the way I look at it is this. We have a situation where you can argue that the Mag 7 has rolled over, but the Mag 7 has rolled over because there's a lot of concerns that they're overspending. And then people are wondering, well, how is that going to dilute or affect my initial ROI assumptions in the future? But they're still spending like crazy. And of course, they're spending on semiconductors. And so the semiconductors are seeing booming demand. And then you have all the data construct, the data center construction has all sorts of spin-off effects, uh, spin-off effects on areas that you never thought of before, like utilities. You got companies like, you know, you mentioned, uh, Corning before. Well, maybe Caterpillar is today's Corning. Caterpillar, all of a sudden, has become a derivative of the AI trade. So you've got the situation right where you have wide swaths of the market that are tied to AI that aren't really included even in tech and telecom. And we actually wrote a report on this showing how the market in general is becoming, over time, increasingly linked to this one macro theme, AI, data centers, and all the multiplier impact that it's having. And then you talk about consumer discretionary, or remember that Amazon is in there. So it's actually very interesting that we talk about concentration risk, and I'm guilty of this too. I just taking a look blindly at tech and telecom and saying, well, look at, we've already like over 40% share. But actually, the concentration is a lot higher when you weigh in all the different companies or sectors or subsectors that are tied to this one theme that comprise a share of the market cap. We have not seen this before. So the question becomes then, not what's happening with the stocks of these Mag 7, because right now investors are rethinking what's the ROI, and maybe they're thinking about what is the total addressable market down the road. But what happens when that translates into, say, a pullback in orders or a pullback in spending plans that ends up having a ripple effect in the other direction? And when we're talking about, you know, what brings us to an end, nobody rings a bell at the lows or rings a bell at the highs, right? By we saw in March of 2000, NASDAQ peaked, but the bellwether technology companies of the day didn't start to really warn until we were in early 2001, which is basically when Cisco started to miss their earnings. It was basically when the news flow was less good than it was by the time it turned bad. If you're still long the market, your head is sliced off. But the news didn't turn bad. You were still down almost, you're pretty well in a bear market, and the news hadn't even turned bad yet by the late stages of 2000. You and I, I mean, it was 26 years ago. Most of the people on this call were probably in high school. But that is actually a bellwether example that all that has to happen, okay, is that the news flow does not match the broad expectation. It just has to be less good. You ask my friend Rich Bernstein, he'll say the markets move on less bad and less good. Well, you know, when you're coming off in the March 2000, sorry, the March 2009 lows, when I was still at Mother Merrill, tell me, was the news still good in March of '09? Was the news good? The recession didn't end till June. >> Yeah. >> No, it's just started to get less bad, and the market bottomed.
You know, you know what's funny, Rosie, that you brought up, um, Cisco in the warning in '01. You know, I remember sitting on the derivatives desk at Merrill. I think it was November of 2007, and Cisco missed their earnings and guided down, and that was actually one of the first major tech companies. Now, I know the focus was not on tech, but we did have some of the biggest market caps, you know, in the world within tech, and that really started, um, a sell-off in technology. So, um, let's wait for Cisco here, people, because that one might be an interesting one. And I don't know if you've seen the Cisco chart, Rosie. But this is a stock you could have had all you wanted with the six handle a year ago, and now it's trading at 119, all-time highs. It traded as high as 130. So, let's, let's get the Cisco indicator going here, you know.
All right. Everything you just said there, I am in agreement with. And, you know, one of the things, and this is going back to Carter saying is like most tech investors that aren't, you know, analysts or they're not managing money institutionally, they didn't know what a remaining purchase obligation is, an RPO, right? There's all those little acronyms there, and we keep hearing CFOs, um, talking about, you know, the backlogs and all these different names, um, for them. We heard about high bandwidth memory and what a shortage was, you know, 20 years ago is DRAM, right? Dynamic random access memory. I mean, the list goes on and on. There's so many like similarities, but what strikes me, if you look at all of these gaps in tech stocks that are not Mag 7 over the last two quarters or so, where these stocks have basically gone parabolic, is, you know, this notion that investors are willing to put a multiple on revenues that are meant to come in the future. And you just said it yourself a couple months ago. This will end in lower capex because return on investment is not going to be so evident right now. Orders will get pulled back. Hyperscalers will realize that they're basically have all these depreciating assets in their data centers, right? And they've kind of accounted for that depreciation over a much larger period. I mean, I know this sounds arrogant, but it is obvious to know how this will end. It's the timing in which it happens. And, you know, Nvidia is a good example of a company. The stock has gone sideways, but the fundamentals at the moment right now, relative to consensus, have not been better, where their margin is relative to, you know, the valuation, and we could come up with a bunch of different metrics. So, help me think about how this unwind will happen. As soon as the semi trade is up and the memory trade is up, and we start to see pullbacks and investors like, "Holy, we just put a five-time revenue multiple on something that's meant to happen in three or four years." You know, we're already seeing data center pushouts, right? Or delays, that sort of thing. So, help me think about that because when that happens, you could say, "Well, the Mag 7 already rolled. It's okay. They're defensive now." But it's this other stuff from a psychology or sentiment standpoint that I think is really going to do the damage.
Well, like I said, nobody's going to ring a bell, but the markets are always moving into new chapters. And so the latest chapter, which I think you brilliantly went through, uh, was about the hyperscalers. Their stocks are rolling over. Then you had to ask why. And a lot of it has to do with the risk that they've are overspending. Now, they haven't committed to spending in the next year, but they made a pledge. Uh, what if those spending plans start to unwind partially? That's going to have an impact. It'll have an impact on the group that the market has brought into, which is semiconductors. Uh, nobody ever thought the Mag 7 would ever go down. Well, the stocks have gone down. Nobody believes that semiconductors will go down, and they'll go down. But just like we saw in the last tech, if you don't want to call it a bubble, the last tech mania back in '99, these things move in stages. I said before, what about financing? I mean, the whole, the whole complexion has changed, and yet the valuations haven't changed alongside that. We have a whole group of technology companies that historically were valued as being asset-light, and now they're capital-intensive. What does that mean? What does it mean now? For the first time, we are seeing cash being burnt, and companies being compelled to come to the debt and equity markets to raise money. They didn't have to do that before. And then it's happening at a time when you're having some major lenders cap their redemptions. And then why are these private debt investors wanting to get out of their investments with private debt lenders? What's happening there? What? So we've got to pay attention to things that people aren't paying attention to. Uh, these are things that don't show up on the screens. This takes rational thought and understanding what is lying around the bend, what is going to happen next, not what's happening now. So all these things, because the markets always move in a domino fashion. I said before, my biggest concern for the broader market, like I'm half in equities. Now, a lot of it is in Asia, and a lot of it is very sector-specific, low-cyclical, low-beta sectors. But half my portfolio, you can say, is in bonds. Okay. Now, we can talk about the reason why I, and I still think, and by the way, a nice chunk of it, probably 10%, is in gold and the miners, because I, I think that once the Fed rate hike expectations come out of the system, interest rates will fall relative to the rest of the world, and the US dollar will go down, and I think gold has been undercut by rising market rates and by a stronger dollar. I don't see that as being permanent at all. But that's been the hamstringing part of what happened with gold and precious metals. Just to put that out there. But, you know, the question becomes, how do you want to prepare for what is inevitable? And I'm not going to get into the timing yet. You don't want to be too early.
Well, I agree. If I was perfect and you're perfect, we would never be early and never be late. We'd be able to time the exit perfectly. And why, if we could do it, why couldn't everybody else? But that's an impossibility. The problem with being late is this. Bull markets are an escalator going up in time, and a bear market, in a bear market, is an elevator going down. Do you know historically, going back the past century, that about three-quarters of the previous bull market condition gets reversed in a bear market, and it happens fairly quickly. Think about that. Think about the mentality out there that people have taken their savings rate down to 3% from a normalized 8% pre-COVID because they believe that their, that their, that their wealth that they've generated in the past six years, call it, let alone the past couple of years, that that is a permanent condition. And the problem for me is nobody has taken profits. You see that in the fact that the asset share at household balance sheets has never been as high as 73%. Nobody has rebalanced. Nobody's taken profits. Nobody has recalibrated their portfolio. And so what happens actually when things start to reverse, and they will reverse? The problem with bare markets is that if you're late, three-quarters of what you made in the previous bull market gets unwound. How's that going to make you feel? Um, because you felt that you were going to get out too early. You know, I wrote a report about this about Charles Merrill. Did you read my report on Charles Merrill in the 1928 letter? Did you read that? >> No, I have to. It's on the >> I got to send, I got to send it to you, and you got to redistribute it. It might be the most provocative thing I've written in the past several years. Charles Merrill of Merrill Lynch wrote a letter to his partners, including to Edward Lynch, back in 1928, to say, "We have to start raising cash. Things are getting too out of control." I would say things are more out of control now than they were in 1928, okay? In every respect, by the way. And Edward Lynch and his partners pushed back against Charles Merrill, who wanted to start raising cash in a bubbly market. Now, remember, it was 1928. The crash happened in October '29, and they actually recommended to him that he see a psychiatrist, and this is a 100% true story. It's in Win Smith's book. Okay, you can read about this. Charles Merrill, who started Merrill Lynch, goes to a psychiatrist, tells him his thoughts, and the psychiatrist sold all his stock. >> I love it. >> So who was the patient and who was the doctor? But the thing is that he finally convinced by, I guess, early '29, 10 months before the market peaked. And you could say, "Oh, well, he got out 10 months early." >> Yeah. >> Sure. He finally convinced the board at Merrill Lynch that they had to start raising cash in their clients' accounts. And you can't tell me that people were not complaining about that back then, up until October 29th. Well, guess what? He saved the firm, you know, up until Stan O'Neal and John Thain, I guess you could say, well, didn't ruin it, just had to sell it to Bank of America. Charles Merrill saved the company. Hundreds of brokers went bust, and he saved the company by not trying to time the market, but by risk management. He saved the company. He went against his own board and went against his own partner, Lynch. Think about that for a second, because I hear that all the time. "You're too, it's too early. It's too early." You know, no, you're going to be. It's crazy. A year. A year. A bubble here. A bubble can last for two years. You know, I had Jeremy Grantham on my call, it, you know. Yeah, but you know, he talks about a two-segment event as a bubble, but don't worry, a bubble can last two years. >> Okay. But at least understand the environment that you're investing in, right? >> There's industry buying. You know, one of the things I think that was, I can't wait to read that report. You know, I think that was touched upon in Andrew Osorin's 1929 book that came out late last year, or similar sort of situations. And the funny thing is, you mentioned that about the psychologist selling the stocks. On the flip side of that, a lot of these CEOs were seeing this woman, a psychic about the markets, and she was convincing them that this is going to continue to go, go, and she lost all her money, which is ironic because it's the psychic, rather than the psychologist, on the flip side of this.
All right, I want to finish this really quickly, and I really appreciate all your time. You know, this stuck out to me, and I've been trying to make the case a little bit, is that people want to talk about the dot-com bubble, and they want to talk about the financialization of a lot of this build-out. Looks very, very different than going back to the late '90s. When you have a private credit fund by two of the behemoths in the industry, this is Blackstone and Apollo. This was announced, I think, in June, you know, early June, the first week of June or so, a $35 billion basically SPV set up, okay, to basically finance the purchase of Google TPUs that are being used by Anthropic, okay? Like, you know, and so when you think about the financialization of this and the circular nature, we haven't even talked about Nvidia funding to the tune of tens of billions of dollars all of its customers and the like. How do you think about the financialization of this? And then on the flip side of that, you have the hyperscalers, which are basically again using all of their free cash flow to build out something. This is part of the whole chain right now. You have to have private credit funds funding this sort of thing. So let's just put a bow on this whole conversation because to me, I think this is where the risk lies, the interconnectivity. But then where are these private credit companies? What they're backing? What is the collateral? And then where is their, where do those funds find themselves into? And we know insurance companies and pension funds, ETFs, and mutual funds. >> Exactly. Well, look, I, and the only thing I can add of value to what you just said, and it's a great point, it comes back to talking about the earnings fundamentals because it almost resembles, you know, the old chaebol industries back in Korea, when everything is intertwined with each other, and everybody is doing business or finance arrangements with everybody. And that's the circular argument, which is probably at least as big as what we saw in the late 1990s when everybody was each other's customer when it came to telecom equipment and fiber optics and so on and so forth. So there's two things. Firstly, there's that added concentration because everybody is connected with each other. Uh, and then you tally on, you know, the one big beautiful bill and the depreciation expenses. And this is where you get into the accounting side of what's happening on earnings because I'm company A, and I'm selling my inputs or semiconductors to company B. I'm getting that revenue as the company doing the selling, and that's pure margin, pure revenue. The other company that's an expense, but they get to fully expense it in year one. Now, this will all come out of the wash. However, this giving you see because we always look at earnings on a 12-month for 12-month trailing. So there's been that skew because the company doing the spending, which is an expense, like if I go buy a whack of computers here in Canada, I don't have that big tax benefit. That's going to be an expense to my bottom line. In the United States, you see, for now, there's that skew. The company doing the buying, you know, gets the full depreciation expense benefit. The company doing the selling gets the full revenue. And voila, we have Nirvana. Actually, when you adjust, when you adjust for that, when you adjust for the depreciation allowance effect, did you know that the price earnings multiple on the S&P is actually 30? It's actually 30 when you do that proper adjustment on the depreciation allowance. So, it just leads me to a conclusion that, yeah, as great as the earnings backdrop is, and look, our friend Michael Wilson, that's all he talked about when he was on CNBC, and I'll tip my hat off to him, but maybe with the accounting situation, earnings are less robust, certainly more concentrated. I said before, what does it mean for people when 90% of the earnings are coming from basically technology? 90%. Is that healthy? It doesn't sound like it to me. And a lot of this is because of this back and forth circular arrangements that you're talking about. So, the earnings backdrop is probably even less bullish than it appears. I'm not going to say it's bearish, it's just less bullish. But the valuation is probably on a, call it, on a reported as opposed to EBITDA basis, is probably a lot more expensive than it looks on the surface. That's why I like the CAPE, the Shiller CAPE multiple, because it smooths through the cycle, and it's at 41. That's a real earnings yield of 2.4%. When you have the real yield in the long bond is like 2.7%. Matching duration for duration. This is what I said before. When the ERP is negative, the markets are telling you and I that equities are no longer a risky asset class. And frankly, when I hear that, I just say I'm not ready just yet in my career to take Harry Markowitz's prize-winning work on the Capital Asset Pricing Model and throw it down the waste paper basket. Our good mutual friend Doug Cass has been bringing up that ERP point for a while, and again, to your point, it's a tough one to trade on. But, all right, Rosie, I appreciate all your time. You've been so generous as always. Um, I feel like we're going to be seeing a lot more of you in the next few months. I can't wait until the book comes out in August. We will definitely do a giveaway for that. We do it kind of cool in a way, David, that people can only leave reviews if they get it in their hands directly from, let's say, an Amazon or a publisher. So, we're going to do that. We have a way in which people can do that and leave reviews, and we're excited about that. Uh, and then the other thing, ETF, we're going to hear more about that when it launches, um, because I think your track record, if you're reading Rosenberg Research, you realize the point that you made a couple of times, you're not 100% US equities. Um, and so there are other markets that exist. This is a point you make quite frequently. Um, so we're looking forward to hearing about the ETF, and again, a trial, a free trial for Rosenberg Research. I'm not shilling here, people. This is a good friend of mine who's been just so good for so long, and again, we appreciate him being here. So try out all of his stuff. We'll put the link in the show notes. David, thank you so much for being here again.
Well, you too, Dan. I'll just make one other note. If you come on the website for the trial, you'll see my model portfolio, which was the genesis really for this ETF, low beta, high sharp ratio, and it's up more than 60% in the past three-plus years. It's been, it's a model portfolio with a single unit holder, which is me, but it's been by far my best investment in the past three-plus years. So who knew? Who knew that the radical permab can actually make?
I knew, and our listeners and viewers know because you've been detailing it. Um, all right, David, thanks so much for being here. Let's do it again really soon.
Thanks a lot, man. This podcast is for informational purposes only. All opinions expressed by me, Dan, Nathan, Guy, Donnie, and any other participants are solely our opinions and should not be relied upon for specific investment decisions.