Transcription
Tape this record-setting run for stocks, and how dependent it now is on the Fed cutting interest rates this fall. Let's ask Tom, Runstrat's head of research, also the Bitmine chairman. He's here with us at Post Nights. Good to see you.
Great to see you, Scott. So, how about that question? I mean, it's on a couple of fronts. Like, we came into this week, which you said was going to be the start of a pretty good rally, which it kind of looked like it was. Now, what?
Uh, I I think that the arguments and elements for a rally to continue are in place because even today, with a hot PPI print, the stock market is basically flat. So, we had a down open. I think investors bought that dip. Part of it is, I I don't think that the PPI is sending a message that inflation's soaring there. There are some things to sort of sort of cut out of that number.
Sure. I I agree, and and people have, you know, said that throughout much of the day, but it seems to have changed the conversation, if nothing else, about the the amount of rate cut we might get in September. Is that fair?
Yes, it's very fair. That is correct. But if you know, as we think about the rest of this year and next year, I think the the thing that's the worst case for investors is Fed hiking. Um, if the Fed does nothing between now and year-end, I think some would actually argue that's half full because the economy can handle these higher rates. Um, but if the Fed does 25 or 50 between now and year-end, really to normalize real interest rates, that's actually positive for stocks. So, I think unless this was going to bring in the odds of a hike, this, I think that's why markets had a muted reaction.
Well, what if they don't do anything? I mean, Steve Leeman, who's going to join us in a minute, made the argument earlier today that this changes the conversation from, you know, 25 or 50 to 25 or nothing. What happens if we go on the side of nothing? Can this market stand up under that?
Uh, yes. I mean, because number one, and I'm sure Steve's going to talk about this, that the economy doesn't seem to be suffering under the the weight of these current interest rates, even though the Fed is much higher than the rest of the world on policy rates. And the second part of that is, of course, that if the Fed does 25, it's still a dovish move.
Well, it could be a hawkish cut. Leaseman's thrown out that too, right? If they cut 25 and leave us with the feeling like, all right, you got your little lollipop here, everybody, and now we're going to wait and see.
Yeah, I think the market reaction, of course, is really how people are positioned, and we at Fund Strat, we're finding a lot of investors are positioned as if we're going to see a pickup in inflation. So, to to them, they were expecting a a really hot PPI number, thought this was going to start a decline in stocks, and that's why I think markets didn't fall as much because I think many people have been positioned for sort of a hot set of PPI numbers.
So, Steve Leeman, I'll just bring him in now. I can only mention him so many times without actually bringing him into the conversation. He's our senior economics correspondent. I like how you framed everything up today, of how the narrative has changed. We continue to hear from Fed speakers too, including one that you spoke with earlier on our air, Musulum Barkin, also speaking within the last hour. What, what are we learning about what this print today really means that investors need to to to hang on the most, you think?
Well, you know, Scott, there's just a split out there. You know, the market is kind of hell-bent on the freight train of a September rate cut, and the the the Fed is simply not, certainly not a majority of speakers so far. Uh, Musulum was right down the middle. Uh, the PPI rising 0.9 for the fastest gain since the pandemic. Take out food and energy and trade, and it's still pretty strong, 0.6. JP Morgan writing, "The fact that there is upward pressure across all recent inflation reports basically is going to give Fed officials some pause," is what they say. And then Musulam sounding like one of those guys who's saying, "Look, I'm in the pause camp here." So, it's a big deal.
Scott, I want to just show you real quickly the two-year note. Take a look at the two-year. And you can see the push-me-pull-you, the tug-of-war going on, uh, with what's happening in the market. You see the two-year, it declined after that inflation CPI report. Now, it's back up here. Now, take a look at probabilities. You can see what's happened. First of all, the 50 cut is out. And and that 93 there is 93 not because there's seven percentage points as there was yesterday in a 50. There's seven or so in a in the Fed pausing. October's almost gone, you know, and so really, we have one rate cut only fully priced in for this year. That's sort of the hawkish cut trade right now, that maybe maybe not in October, and and better pro probably not in December. So, that's where we're at right now when it comes to, uh, uh, Scott, the, uh, the Fed funds trade and how they're all reacting to this.
Um, I I think zero or no cut is a possibility for September, but it's all going to hinge on that December, sorry, September data of inflation and jobs.
Hang hang with us as we we go back to Tom. Um, you made the argument that this market was not just going to start this next leg of the rally this week, but it could potentially be a sizable one.
Yes. Yes. That I I think you told me we could go 6,600, if not higher, uh, this month.
Yeah. And this doesn't change that at all.
No, it doesn't. You know, I we last week we said the breakaway move would be S&P 656, 6600. Uh, so I I think that's still intact. I I don't think that one data point is enough to change a thesis around the trajectory of inflation. And our base case remains that this is going to be ultimately viewed as transitory by the markets. But we have we have this tension that exists. Labor market looks like it's weakening, and now the inflation market looks like it's at best just kind of staying where it is, if not getting a little bit more sticky. I mean, that is a real tension that the Fed has to deal with and may ultimately have to make a decision on one side or the other. We think we know which way they'd lean, but we're not entirely clear. I'm not sure the market is either.
Yeah. Well, I guess this is the challenge for the Fed because they're having to make a decision where there's no equilibrium, right? Because the market's tension around whether there's weakness and deviation from the job side versus inflation, it is really the Fed trying to manage expectations and keeping inflation expectations anchored. So, a lot of data between now and the next meeting may not be inflation-related, but it's really how the market is perceiving these inflation prints. And if if we shift towards viewing as transitory, it makes it easier for the Fed to move forward.
Steve, you have Goulsby tomorrow morning, don't you? I can almost assume that we know what he's going to say because he's been non-committal in everything leading up to this interview tomorrow, right?
Yeah. He's one of the ones who has already said that he's not convinced it's a one-time price increase. But I do want to echo something here from the, uh, Kansas City Fed. He'll be our host next week in Jackson Hole. He said specifically that he looks around, he goes, "Hey, I don't see that we're so tight." He looks at the stock market, looks at the bond market. Which parts of the economy would you look at and say, "Okay, we could be doing a lot better here"?
Tom also said something that I want to make more confusing and more technical than Tom said it, which is that there's stuff happening on the equilibrium on both sides of the Fed's mandate. You tell me what the right equilibrium rate is for the employment market, given what's happening with immigration and deportation. Then tell me what the right equilibrium is for inflation, given what's happening with tariffs. Both of these things are in constant flux every day with a tweet from the president. Other things going on, trying to figure it out. That's a reason I think some Fed officials would say, "Hey, I'm waiting to figure out what's going on here before I do anything."
I mean, wi with all due respect to to President Schmid, I still want you to get a good room assignment in Jackson Hole, Steve. I mean, the housing market is horrible. If he if he wants to look at one really important place that maybe carries a lot more weight than other areas, it's terrible. And and cutting rates, many believe, would help at least give a little bit of medicine to that.
Yeah. I I'm not sure, Scott, that cutting interest rates wouldn't mean that the money you save on the interest rate wouldn't go right into the asking price for the home. So, that's not clear to me that it's an interest rate problem as much as it's a supply problem. So, I agree that lower interest rates would help some people into their home, especially the hardest hit out there, the first-time home buyers that have to struggle and stretch to get into a home. I agree with that. But right now, when you have a limited supply, what would happen was a rate cut would end up increasing the price of the home, not necessarily in a saving for the buyer. And by the way, if that's the problem, and I'm going to talk heresy here, nothing stops the Treasury, the administration, or the Congress from providing further assistance to the mortgage market if that's what they want to do. Treasury can go out and buy and buy mortgages and drive down the rate if they think that's a problem. The Fed's trying to make a single interest rate for the entire economy. And right now, the way they see it, they're a little bit above neutral, a little bit restrictive, not 150 the way Scott Besson says. And we just had David Zervos on, one of the potential candidates for Fed chair, who said the Fed should cut 50 and they're leaving millions of jobs on the table. That's Zervos's point of view.
Yeah, Steve, thank you very much. Steve Leeman, look forward to morning with Goulby, our senior economics correspondent. Alicia Leavine joins us now, too. BNY Wealth head of investment strategy and equities. Good to see you.
Great to see you. Um, if nothing else, since we're talking about housing, the housing trade, which had been going gangbusters for a handful of days, seems to be now in question as a direct result of the conversation that we've just had with Tom and Steve.
Well, it's completely levered to what's happening with the probability on rates. I'll say this, that I I like my friend Tom Lee here, think that there's asymmetric risk to the upside in risk assets because everybody is waiting for the sky to fall, whether it's a looming recession or whether it's sky-high inflation. We're waiting for the stagflationary moment, and people are positioned as such, and they're underfunded. And in the end, when the data come in such as CPI earlier this week, on target, on the screws, essentially, allows for a rally. Today was a surprise to the upside on inflation, but it's a point. It's not a trend. And I'd say that there there is going to be more data. But ultimately, I believe that if the if there is a choice between choosing the inflation side of the mandate or the employment side of the mandate, in a world where the equilibrium is now between, let's call it 40 to 70,000 jobs as an equilibrium rate to keep this low 4% or more or less unemployment rate, the Fed's going to be very aware of that.
Well, that's why I said earlier, I I wasn't trying to be cy about it. I think we know which side that they would lean on because they're going to lean on the unemployment side. And if you know, if the Fed starts to cut in September at 25, it is rarely a one-time cut. It's never the lollipop.
Let me let me ask you, you get a couple of lollipops. You use the word, um, underfunded, and I want to make sure I understand what you mean. Um, we're at record highs, right? You're are you you're saying that there's still too much cash on the sideline from from non-believers?
Yes. Yes. There and and and let's just say it, there has been a political undercurrent to all of this on the policies and the fear of the policies and sort of the the the investor sentiment being at rock bottom in March and April has not fully wound out of the market yet. And you have a lot of hedged portfolios and you a lot of investors. What are we at $7.5 trillion in cash on the sidelines, simply waiting for something to change? In the meantime, the S&P's rallied 28%, NASDAQ's rallied 40%. The US has trounced the rest of the world. Remember, fleeing the US and US exceptionalism is dead. By the way, the US outperformed rest of the world by 10% since April 8th. So, you know, all that has really come in the face of people not believing in it. The investor sentiment is not overheated, and that's why we still think there's asymmetric risk to the upside, understanding the Fed has the the worst of dilemmas here.
I think you agree with almost everything that Alicia said, right?
Uh, that's not that interesting. That's right. I I just would say ditto. Um, but I think one of the points Steve I would have made as a counter to Steve on mortgage rates is that there's still an excess spread of the 10-year versus the 30-year mortgage. And I think if the Fed resumes cutting, that spread, which is historically 165 basis points, it's currently over 300. So, we could see a disproportionate decline in housing costs. That's a lot of relief to a lot of Americans, especially when Powell talks about the pain of inflation.
Um, almost almost every single call, every single time about any single start to the broadening trade has been wrong. It's lasted and then it's petered out because there just wasn't enough stimulus behind it to to keep it going. We just have we had another one of those moments. Are we in the penalty box again? Because what was maybe 50 is now 25 or none, and these kinds of stocks just cannot work in that environment.
I I think small cap has a challenge because of the earnings picture for small cap. The best companies have been picked off by private equity, and you're really left with a difficult basket of stocks. Having said that, Midcap is very interesting here because it's filled with industrials and financials. The deregulatory agenda and the one big beautiful bill is actually very beneficial for these companies, and they're going to see an earnings boost, a margin boost from this. So, I'm going to separate my midcap from my small cap here and say we do think there's an opportunity in midcap. You know, I think the small cap trade when it comes is literally that, it's a tactical trade as you push through the excitement, and if there's a Fed cut like it, you know, we don't try to time the market, but I think it's got a a time horizon on it.
I hear you. But I mean, this has largely been a large cap rally, um, from the bottom in in April. Whether you're talking about mega caps or industrials or financials, that's what's gotten you here. Any reason to move off that?
Uh, well, I mean, let's if we look at August one as like a a benchmark because we're halfway through the month, even with today's decline in small caps, they're up almost 4%. Which is 350 basis points above the S&P, and Ethereum, which is correlated to small caps, is up 26%. So, I don't think we've unwound any of the progress small caps have made following a series of data over the past two weeks. So, I think today's PPI number is not really being seen as from when a market's perspective as really changing anything.
That's how you see it. That's how I see it as well. I I still think there's a trade there to move into other asset classes. It's it's a bad day. I mean, just to go back to the Steve Leman point on the on the housing market, you know, if there is a cut on the margin, you'll have existing homeowners start being able to move out as as mortgages come down. Of course, he's not naive to that. But you get the you get the supply issue there because it's been frozen. People have been frozen in their houses. That's been as much the freeze of people trying to buy a house. It's like if you have one and you're sub-three mortgage, which so many people are, it's like, why in the world would you sell and then where the heck are you going to go?
Yeah. So, it it it cuts always.
Um, guys, thanks very much. Alicia, thanks. Tom Lee, always good to catch up with both of you. Crypto.
[Music]