Market Moves and Monetary Mysteries: Navigating the Current Economic Landscape
In this episode of the Fat Pitch Podcast, hosts Paul Barausky and Clint Sorenson dive into the latest developments in U.S. monetary policy and global economic trends. They explore the implications of recent Federal Reserve decisions, the impact of China's stimulus measures, and the shifting dynamics in market structures. With insights on inflation, credit growth, and investment strategies, this discussion offers listeners a comprehensive look at how these factors shape today's financial landscape. Join Paul and Clint as they unravel the complexities of the market and highlight potential opportunities for savvy investors.
RECORDED SEPTEMBER 26, 2024
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Paul Barausky
Well, Hello, everyone, and welcome to the fat pitch podcast the most irregularly scheduled. Podcast you may ever see, although Clint.
my co-host here, tells me we are going to get back on schedule over to a week. Clint, how are you.
WealthShield Advisor
00:19
I'm doing. Great. Paul! How are you, man?
Paul Barausky
00:21
I'm good. Thank you for those of you who are tuning in for the 1st time. I'm Paul Borowski, chief distribution officer for Sealy investment securities, and my co-host here, always in a different hat, is Clint Sorenson, founder, and CEO of wealth, shield, and many other entities. A terrific market technician, Cfa. Leader of I don't know how many analysts, and if you ever get a chance to see him speak, usually always on Point Clint, I want to pay you a huge compliment.
We're doing away with one of the segments that we run, and I had somebody calling me in tears because they said, once a month. You distill market information as well as anybody. So, thanks for being on today. What do you want to talk about? We try to do the fat pitch on 3 things. What's first.st
WealthShield Advisor
01:08
Yeah. I think the 1st is the fed. Right? Don't fight the fed. We gotta talk about the fed.
Paul Barausky
01:13
Yeah, 50 bits. We got it. We wanted it. We didn't get Jeremy Siegel 75
got, but we got 50, and you told me you knew it was coming when Nikki leaks you know. Knew it a week ahead of time.
WealthShield Advisor
01:30
Yeah. And you and I've been talking about this for a while. Right? Everyone was in the 25 Basis Point camp. There is even some people talking about no cuts with all the landing narratives. And you and I were just saying, Hey, it's gonna be 50, because, you know, a lot of people are just looking at the headline, Economic Numbers.
Not understanding that those are usually lagging and subject to heavy revision we're about to get. We got a heavily revised negative number in jobs right? 818,000 jobs came off the payrolls
that were previously announced as growth. And then we're about to get a huge Gdp revision negative this week. So when you look at that
that's what everyone the market commentators are looking at. Oh, economy stable.
You got to look underneath the hood, and the Fed's doing a good job. Looking at that, they saw deterioration in the labor market, they shifted their focus through inflation.
which the trend was down definitely disinflationary. And they looked instead at the economic activity. And there's notable notable slowing
in the economy and has been slowing since April of 2022, right? You can't stop private credit or private sector credit growth without having economic decline. So the fed did the right thing. If I was Jerome Powell, Paul, I would have stepped out and said, Hey, we're cutting 180 basis points. We're gonna get to neutral right now.
Paul Barausky
02:41
Would have put the market into shocks giant defibrillator. But I find it interesting. November, which is, look
exciting. November's futures, betting of a 61%, 50 basis point rate cut is like ranking college football teams. Preseason right too early to tell. I know as a tar heel basketball fan, you're already. You're still angry from last season's drop off, and you'd like to see where they're ranked almost immediately. But we're still in football season, and your stud quarterbacks up in New England, struggling so
back is too early to tell. I don't know. 50 feels right this early in advance. You had Austin Goolsbee on Cnbc. As he's always is, he is more dovish than most, you know. I think the people in the Fed are concerned. What you said about the economy and about unemployment, and not just about inflation.
WealthShield Advisor
03:38
Exactly. I think the the focus has shifted, and that's the important piece. Now, the question is, will this ignite inflation? That's the next question Paul is, do we have the necessary economic precursors? Is this rate cut or the path to to a future accommodation? Because we got away? We got a ways to go right. This is more animal spirits is what you're seeing now. But a 50 basis point rate cut is pretty large. Historically.
if you look at the 1st cut being 50 basis point cuts. It's usually a pretty tough economic environment. You have to go back to 2,007, 8. You got to look at 2,000 to 2,001. It was 2,001.
So those are the time periods when you had interest rate cuts that are 50 basis points. Typically, this 1st is 25. But we got way too tight. So
this time is always different, and I know those are dangerous words. But I'll tell you. I think the key is looking forward on growth, and what we're seeing is the rate of change on leading indicators actually bottoming. Now leading indicators have a bottom, but that rate of change has. And so what we're going to most likely see is you get a steepening in the yield curve. You've got really easy financial conditions. If you look at the Goldman Sachs financial conditions index
and you start to see the fed really clarify the path which I think is going to be more aggressive than people are thinking, because they were more aggressive on the tightening cycle, and inflation is continuing to head down.
That's gonna lead to. Just because of where we are. In 25, you're gonna get an acceleration and growth in the 1st half.
My question is. And I think this is the big question for everybody is, what does that do to inflation? Do we have growth and inflation accelerate together? If that is the case. The fed historically tightens in that period, so I would expect them to slow or stop
the rate declines. And so they've got to cut really aggressively on the front end
in order to go into 2025 with a lot easier.
Paul Barausky
05:24
That's right.
WealthShield Advisor
05:24
Calls.
Paul Barausky
05:25
Going to ease off a little bit so you could go 50, 50, and then slow down. Well, we did see on the announcement the 20 end of 2025 target on fed funds. I think I saw 340, so that narrative would fit what you're talking about. We got a lot to see, but when it comes to inflation, look.
a lot of economists. Just throw out that us home prices hit another all time high in July, rising 5% over the last year. Any thoughts on that, since it's such a big component.
WealthShield Advisor
05:56
Yeah, I mean, you know, that's that's 1 thing right. But owner occupied rents is more important than like Caseller, home price index. And those
those continue to go down now, base effects so kind of the base level they get a little more troublesome in the 1st half. I expect an uptick in inflation.
Does it go to 3, 4? I don't know. Right. From 2, 8, slash, 2, 7, maybe on the low end up to 3, 4. Possibly we could have a meaningful uptick, because base effects get more challenging as we enter the back after this year or last quarter of this year, really December, which is reported in November into the early part of next year. And so, just because of that kind of 2 year.
comparable base effects, that how Cpi is calculated. You could have some. You could have some pressure there because of owner occupied rents, obviously kind of trailing off slowly. But you just you just have less base effect benefit that we've had this last quarter. This big drop off we had in inflation was because base effects were giving us a great comparison over the last 2 years. Now that's getting a little more difficult in the 1st half of the year. I don't expect it to be meaningfully difficult.
but I do expect it to throw a wrench into the Fed's plans, so they have to get to below the 2 year rate. 2 year rates at what? 3 8. Today
they have to get below the 2 year rate to become accommodative, so that 3, 4 that you mentioned that's perfect.
Get to supportive of private sector credit growth, and you will have. The economic cycle is very easy in the Us. It's completely dependent upon the flow of credit.
So as long as you're allowing the private sector through the banking system to create credit, you can get economic growth. And we have that has stopped that stopped in 2022. As you know, Paul, looking at the real estate market, it essentially stopped.
And now, when you look at it going forward, it still stops. Still, like 20 net. 22% of banks surveyed are tightening credit standards. That that's crazy at this point, right? The Fed's cutting rates. So we've got to get to accommodative. We've got to allow credit to start flowing. We are going to get economic growth. We're going to get a slight uptick in inflation, most likely in the 1st half of the year, and the fed needs to handle that in a data dependent fashion. But they don't need to be too sensitive to interest rate, because to inflation.
if they are too sensitive to inflation, they run the risk of creating a landing scenario that they don't want, which means they cut off growth too soon. You end up back in a decline, and that is, that's a very dangerous place to be. You've got to allow the economy to recover. And I know a lot of people hear that. And they're saying, Oh, but we've been in a robust economic environment. No, we've been in a robust market environment. If you want to look at, if you want to look at recessions, look at. There hadn't been a recession in the consumer.
But if you look at recessions where the recessions have been, they've been in commercial real estate. They've been in trucking and transportation. They've been in manufacturing. All these areas have been in in really tough spots. And now you're getting labor market deterioration, which shows you that you're at the tail end
of the contraction, and we need supportive policy here.
So hats off to the fed.
Paul Barausky
08:57
It was just 2 years ago. It was just 2 years ago. I was doing that presentation about trendemic and trends in the pandemic and talking about the employee, not the employer, having all the power up and down the wage scale, and the worm has turned also, as somebody who lives, eats and breeds commercial real estate. I, for one, am applauding that the past 2 years are over. It has been like unscrewing, rusty lug nuts with my eye sockets.
It's amazing what's changed since you talked about our economy. Let's go to the other side of the globe, because again, we're recording this on Thursday, September 26, th and I woke up to see a whole lot of things I haven't digested yet coming out of China in terms of economic policy. What the heck's going on.
WealthShield Advisor
09:43
Yeah, you know, they need to stimulate. And so they're they're jumping in with big stimulus. And it's been needed. Their economy has really really suffered, due to the fact that they're essentially pecked to the dollar. We've been extremely tight from a monetary perspective or a monetary policy perspective.
And remember, when you are pegged to our currency, you are literally giving us control over your monetary policy.
And so that has been a substantial issue for for China and their economy. And so it's been very deflationary. And you've seen that in property prices, you've seen that in economic activity
you've seen that in the stock market. That's another recession. If you want to point out to global recession number 2 economy in the world.
a lot of their stocks are down. 80 90% from the peaks. So their market got completely crushed.
And now
you have stimulus. They directly made 500 billion available to banks to buy stocks. So think, think about that. That's direct stimulus into the economy, and the markets are celebrating it.
Paul Barausky
10:44
Iv.
WealthShield Advisor
10:45
Yeah.
Paul Barausky
10:46
Well, you know, you talk about their economy. We've noted in the past just personal discussions, maybe recorded just the sheer amount of commercial real estate in their economy.
and then their leverage on it, which was greater than ours, going into the global financial crisis, meltdown by a significant multiple.
WealthShield Advisor
11:05
Yeah, you've never seen debt build up like we saw in China. As a percentage of Gdp, it's been absolutely breathtaking and unbelievable.
But they had to again, just due to the fact that they're paid to the to the United States dollar. So it's it's been a wild ride, but I think they're poised for significant growth. They have some issues demographically, as we know, population shrinking. But I think that the government has to step in and they're doing it
and look. Their mechanism of stimulus is a lot more efficient than our mechanism of stimulus, because they, when they make a decision, they flow the money right into the system, that money goes exactly where the government says it should go, and it gets put into the economy. So I think this stimulus is going to be meaningful, and I don't expect this to be just the beginning or the end of it. I expect this just to be the beginning.
Paul Barausky
11:54
I always tell people when you have complete control. Like China, you know, we go to the doctor to get the prescription. You take some pills wait for them to take effect. They put an Iv right in the arm.
and that.
WealthShield Advisor
12:06
And if you look at a lot, that's exactly what's happened. And if you look at a lot of hedge fund managers, I've been following them. A lot of them moved out of us. Tech, and I think this is one of the greatest fat pitches that I see personally. But they moved out of us tech into China Tech. And I think and you saw that positioning last quarter right? So Michael Burry, famous for the big short right. He was Christian Bell. Christian Bell played his.
played him in the big, short movie.
and he, I think his largest position is Baba, so big Chinese tech. And if you look across Major Hedge funds, a lot of them have allocated to not only that name, but several names within the Chinese tech space.
And so I think a long Chinese tech short, us tech play might not be a bad might not be a bad play, especially if we're going into an economic recovery. That might be the fat pitch.
Paul Barausky
12:53
It might be, which brings me to the 3rd thing I wanted to talk to you about today, which you and I have spent
hours upon hours talking about which is the Us's printing press when it comes to printing Benjamins.
and very quietly, I think unaware are most people that over the last year the money supply grew by 2.2%, and that's the biggest year over year increase since September of 2022. What gives? Why, how do you view that.
WealthShield Advisor
13:24
Yeah. Well, money supply collapsed during the Fed's tightening phase. Right? So and then they had to stave that off during the banking crisis. So that if you really look at money supply, just look at a year over year percentage change chart.
that percentage change really the bottom in the midst of the.
Paul Barausky
13:42
Thank you. Christ
version. Is this just reversion to the mean.
WealthShield Advisor
13:45
No, not necessarily right. I mean stimulant globally, there is global into. So if you look at global money supply, it is increasing.
And so if you look at global money supply and you look at, if you look at just overall liquidity trends, they are trending upward on a global scale. The Us is actually lagging the globe in that regard. And I think
this is just the trend we're in at the end of the day. We're in an environment where
a lot of people call it a currency debasement race to the bottom. I'm not necessarily in that camp of the de-dollarization camp. But I am in the camp that
governments are going to continue to stimulate and going to continue to support their their economies and money supply growth is going to continue. It has to continue to accelerate because we have such this, this huge debt load globally.
and that huge debt load is deflationary. And so you're pushing against that deflationary debt load by creating monetary inflation through money supply growth. Now.
if you follow money, supply growth, and it is upticking in the Us. And globally, which you typically get in conjunction with that
is, if you get money. Velocity, in particular is you get inflation.
And so china stimulus is going to be meaningful, in my opinion. And global. M. 2. Because
if you think about what happens with that stimulus when it goes right to the real economy, it benefits commodities. And what do commodities do when price and think about the fed easing at the same time? So dollar moving down commodities, moving up. What does that do to inflation? It moves inflation upward. So
I think it sets. I think I don't think it's gonna be as grand as everybody says. Oh, we're gonna have the second wave of inflation like the seventies, you know all this what I call fear porn for.
Paul Barausky
15:27
Yeah, I call it. I call them financial pornographers.
I also there's so much click bait right now that you gotta write sensationalist stuff right?
WealthShield Advisor
15:36
Yeah, and that's it. That's what that is, in my opinion. Sure it could happen. But look, there's never been a case of historical hyperinflation in a currency that borrows money in its currency.
So I don't think that's a big risk for the Us. We could. We have high inflation, or another uptick for sure.
But hopefully, that's accompanied by growth.
but my supply growth at 2.2%
on a year over year basis isn't meaningful. Think about what it was in (202) 120-2021.
It's like 42%.
Paul Barausky
16:03
Vertical. So since we're doing these in a little more compact fashion, I don't want to impact this whole thing. I want to record it with you on Monday or Tuesday, when I'm back from Europe. But are you aware that earlier this week I'm going to throw some numbers at you? There's someone I follow on fin Twit, who pointed out that the S. And P. 500 early in the week was now 300 points above the highest
2024 year end price target from all of the Wall Street strategists and 18% above the average target. And there's still 3 months to go. And so we know that around an election the market usually doesn't take big move right? But all the rules seem to be up. What is going on? I mean.
WealthShield Advisor
16:47
Market Structure.
Paul Barausky
16:48
Percent.
WealthShield Advisor
16:49
It's a hundred percent market structure. Market structure has changed in such a meaningful way that people are going to be writing about this for a long time indexation which are essentially price takers are now the dominant force in the market, so their market cap weighted indices. So it causes one problem on one end is where we underinvest in areas that need investment to help us economically long term. And you're just investing in big tech because there's a big market cap. Names.
Paul Barausky
17:15
There you are!
WealthShield Advisor
17:17
But what's happened is indexation. Is this endless bid?
And if you look at that, plus if you look at foreign capital, flows over to the Us. Guess where all I mean, even foreign central banks. Guess what they buy. They buy the big Mega cap liquid names because they need liquidity, and they want participation in those investments, and it becomes a self fulfilling prophecy. So what happens is you get the price takers indexers right?
That are now the big dominant force in the market. They become the price makers. And that's a problem. Because there's no price discovery. They just buy the biggest market cap names they don't care. So momentum is so powerful now. And that's essentially what the S. And P. Index is. It's a rules based momentum index, where essentially, you're just doubling down on the bigger names.
So you're following flows. And I think that's what we see today. I think it's market structure related. It's very positive in the near term, but I think indexation long term from a contrarian perspective, is the most dangerous thing you could do right now from an investing perspective, because the expected returns are a lot lower.
If you buy a market cap weighted index, and if you buy small caps or international or china, or if you buy real estate right? All these relative because of indexation. The relative valuations between these different segments is as
stark of a contrast as I've seen my career, I mean, just look at real estate.
You look at the reit reit index versus the S. And P.
Paul. It got below on a relative basis. The 2,009 lows.
Paul Barausky
18:43
Oh, well, I showed you I showed you the mercer piece from earlier in the year, which showed the last 3 big downturns.
You know, tech tech crash early, 2 thousands. Global financial crisis. You don't even need to pick the bottom showed 5 quarters, 2 on either side of the trough and it's remarkable. So I think he gave us some cool, fat pitches today, as always.
this is fun. We should drag one of our friends on for our next episode. See if they can wax philosophical.
WealthShield Advisor
19:15
Let's get Jay.
Paul Barausky
Yeah, yeah, let's do that. So Clint and I appreciate your time today to our audience who tunes into this hopefully, we appreciate you listening to the fat pitch, and for Clint Sorenson and Paul Borowski signing off today, make it a great one.