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On this episode of On The Tape Guy, Dan and Danny discuss feeble moves in the stock market (1:00), how Dan Benton’s 20 rules for tech investing can relate to Tesla (13:00), Ally Financial’s earnings showing auto loans slowing (20:50), an update in the Cannabis space (23:22), Liz Truss resigning as UK prime minister (25:00), risks lurking in the stock market (27:36), and Danny’s NFL picks (34:20). The co-hosts interview Michael Kantrowitz, Chief Investment Strategist & Head of Portfolio Strategies at Piper Sandler, and talk about his HOPE call for the economic cycle (44:38), what would make the Fed pivot (50:33), his outlook for 2023 (53:00), what precedes a recession (1:03:53), and what would change his thesis (1:10:45).
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Show Transcript:
Guy Adami: [00:00:00] CME Ad. [00:00:01][0.4]
Dan Nathan: [00:00:30] iConnections Ad. [00:00:31][0.8]
Guy Adami: [00:01:21] 44 years ago tomorrow Dan Nathan. [00:01:24][2.5]
Dan Nathan: [00:01:25] First day on fast money for you. [00:01:26][1.0]
Guy Adami: [00:01:27] Oddly enough, no, but it was close. I know. Neil Young and Crazy Horse played at the Cow Palace in Daly City, California. And now folks are saying, All right, Guy, you’re off the rails constantly. Now you’re really off the rails. I mention that because the album Rust Never Sleeps was recorded from that concert Danny. And I mention that because Liz Truss has a book coming out out of the blue and it made me think of the song out of the blue and into the Black A Great Rust Never Sleeps Neil Young song. And it all comes full cycle. And I know you’re going to ROTT on that later, so I don’t want to give up the ghost. But what’s going on in London? What’s going on in England is madness at the highest order, by the way. You’re listening to the on the tape podcast. I am Guy Adami, that is Dan Nathan and of course, Danny Moses who comes into this week a really pedestrian, I believe, 10-8 in the league where they play for pay. But Danny, so many crazy things going on, by the way. We’re going to speak with Michael Kantrowitz later from Piper Sandler, who has been as correct as Mike Wilson from Morgan Stanley. So we’re curious to hear what he has to say with this market. But Danny. Liz Truss, bond markets, bond volatility, everybody seemingly talking about the things that we’ve been talking about for the last 18 months. [00:02:53][86.2]
Danny Moses: [00:02:57] Hey hey my my. Is that the same song? Correct. [00:02:59][2.2]
Guy Adami: [00:03:00] Yes, it’s the same show. Rock and roll will never die. Yes. [00:03:01][1.0]
Danny Moses: [00:03:01] Since we’ve started this show, I know we’ve probably said it a few times, but I really mean it this time. We are approaching the crescendo here, not of the market being up, but everything kind of coming together where I think things are going to finally start to seep in to investors where, yes, companies can have good earnings. We talked about this weeks ago. Watch out for the Procter Gamble’s of the world. They can be okay, right? Watch out for certain names. Lockheed Martin, it’s defensive, no pun intended. They’ll be okay. Right. You can own things. And I think that’s very important to understand. But the backdrop of this is all of the interest rate sensitive, consumer sensitive stuff this economy has been and will always be through every cycle in the United States, consumer discretionary dependent. That’s just the way that our economy is set up and they’re starting to get hit. And we’re going to talk about some of the companies and auto finance we’re seeing. So even the big banks that all came out, yes, they didn’t implode. So the stocks traded up. They were fine. They’re reserved fine. But look beneath the covers of those banks and what they’re telling us, and it’s not a pretty picture for the consumer and it gets a little bit worse every day. And eventually that’s going to work its way into these companies and the economy, in my opinion. [00:04:09][67.4]
Dan Nathan: [00:04:09] Well, it’s interesting you mentioned the banks, Danny, and the sentiment couldn’t have been worse on the way. And we had a little conversation, I think two weeks ago just talking about is kind of bearish is we are collectively about what’s going to happen to the consumer. We know that we’ve had this kind of dance between Jamie Dimon at Jp Morgan and Brian Moynihan at Bank of America. And they’re saying so very different things about the consumers, despite the fact they’re very similar money center banks. And, you know, the way the banks rallied out of it was telling, except that some didn’t participate that well. And then if you think about what’s going on in technology stocks, I mean, we know that next week is going to be the big one. Tuesday, I think we have Microsoft and Google and Thursday with Apple and Amazon. And if they are, let’s just say, collectively worse than expected, I think we know which direction the market’s going to go if they’re not as bad as expected. Maybe we have that sort of reaction that we got late July and August. But I got to tell you, man, the bounces are getting more feeble and more feeble by the day. This little bounce in the S&P 500 off the lows doesn’t feel particularly great, especially when you consider the fact that it encompasses what happened with the banks last week. And so to me, it really feels like we’re making a series of lower highs in the stock market, and those lows from last week seem very, very achievable in the not so distant future. [00:05:28][79.1]
Guy Adami: [00:05:29] Yeah, it’s interesting. So I was one of these people and I’m going to put myself out there the thought and maybe it’ll still come to fruition. But I thought what we were setting up for over the last week and a half, two weeks, was eerily reminiscent to what we saw on June 16th or so. Everybody bearish market making lows, fed speak, blah, blah, blah. And then in retrospect, it became the buying opportunity, at least of this year as the market proceeded to rally about 19% from the middle of June till the middle of August or so. Now, I’m not suggesting it’s going to be to that magnitude, but I thought we could get a decent bounce and maybe there’s some hope in the form of next week, as you mentioned in on Tuesday, Microsoft, Visa, Google, Texas Instruments, to a certain extent, names like UPS and Coca-Cola. Wednesday, we have Facebook, Boeing, on Thursday, that’s going to be the big day. That’s Amazon, Intel and Apple. So next week is the week that maybe this market can get its footing, at least in the short term. Danny But am I trying to be too cute here? Am I trying to be too tactical? Because Mike Wilson, who is still bearish, by the way, had a similar call a couple of weeks ago. A week and a half or so ago. [00:06:36][67.8]
Danny Moses: [00:06:37] Yeah, listen, I mean, I think the one thing that kind of slipped through the cracks, you go back and you look to see what made the market rally late last week and few days this week is the article The New York Times titled After the U.K. Market Out, American officials asked, Could it happen here? And when you open it, it turns out the U.S. Treasury officials and maybe even some Fed officials were either up in New York or speaking to some of the big banks and had a conversation, quote, Multiple officials said this week they expected the Fed would step in to buy bonds as the Bank of England did in an emergency. And I’m wondering, you know, again, we’re going to wean off of this heroin at some point with these central banks. We’re already seeing what’s happening in Bank of Japan, Bank of England. I think it’ll be proved to be temporary, but I think that’s this backdrop still that we’re still trying to wean off of. And I believe that was probably what was driving the market a little bit, whether they were actually in there doing anything from a QE perspective, I don’t know, but something that definitely paid attention to and a little bit caught off guard that that didn’t get as much press as it really should have. [00:07:31][53.6]
Guy Adami: [00:07:31] Well, they’ve got to be preparing, I would think, in the in the case of a fire break glass type of thing. So you have to be prepared. But I think we got to be at least 3% away from the break glass portion of this equation. In other words, if rates here are, let’s just say 4%, I mean, we’re not close to an environment or situation where I think Dan the Fed would step in. Maybe I’m wrong. I mean, maybe the panic button is at their fingertips right now. But if it is man oh man were in much worse shape than I thought. [00:08:02][31.2]
Dan Nathan: [00:08:03] Yeah, well, I think you’ve been making this point, guys. It’s not really going to come from the equity market unless we see a swoosh. Right now we have an S&P at 3600. And I think we all agreed a couple of weeks ago when Mike Wilson was on, it’s probably 3000 in short order where the Fed actually has to start moving their feet as it relates to what’s going on with rates. But November 2nd is coming pretty quickly here and that’s going to be the fourth consecutive 75 basis point hike. And I think given all of the uncertainty that we’re seeing here, this is going to be a theme. Even though companies might end up beating lowered expectations that have been coming down all year and have been actually accelerating to the downside over the last few weeks into this earnings cycle, the lack of visibility that they have, the lack of confidence they have in their Q4 guidance, which they are already almost a month into, and their inability to forecast for next year is going to be the thing that I think keeps us from having the sort of rally guy that we had this summer. Think about that. At that point, we were only halfway through this thing. And now the fact that we’re a couple of months later here, China is still locking down. There’s no end in sight with the war with Ukraine. Things keep getting worse. What happened with OPEC+ the Nord Stream pipeline. I mean, the list goes on and on. And then don’t forget our midterms in a couple of weeks. [00:09:21][78.6]
Guy Adami: [00:09:21] Danny, I say the cheapest thing you can do is pay attention and I know you get a kick out of that. And I like to think that I deem that myself it’s probably not true. But what I’ve noticed, every time the market tries to pick up its head, some Fed official comes out. We had Harker this week. We had Bullard speak. And I got to tell you something, they seemingly come out of the woodwork to try to tell the market, Hey, if you think they’re the all clear sign, think again. Because we are steadfast in our need and our want to fight this inflation bug, which, by the way, they were begging for for years. So am I missing something here? Because seemingly, Danny, it’s happening not only on a weekly basis, but seemingly on a daily basis. [00:10:00][39.0]
Danny Moses: [00:10:01] Yeah. Listen, the bond markets doing their work for them. What I’m watching right now is the ten year yield slowly moving its way higher here, and that’s going to do its work for them. And so they can keep chatting and talking all they want. But now I’m watching stuff that’s really going to start to have an impact stuff. We’re going to talk to Kantro later, but stuff like housing starts is already being impacted. Interest rate across home equity loans, auto loans, all this stuff, it’s starting to happen now. So that’ll self-fulfilling there. We’re going to slow down. So I’m done paying attention to the Fed. They are going to overshoot. They’re going to keep talking a big game because they have to they’re watching what happened in Bank of England, and I think that they’re really paying attention to that here. And so, again, they’re just noise to me at this point, I’m more focused on what does it actually mean to these companies? And I’m watching as we see these guys, the ten year yields above 4.2%. That’s going to start to have a massive impact here for sure. [00:10:51][49.4]
Dan Nathan: [00:10:51] So, Danny, Nouriel Roubini is coming on in a couple of weeks and he was. [00:10:53][2.6]
Guy Adami: [00:10:54] Wait a second, he’s coming on the on the tape podcast. [00:10:56][2.2]
Dan Nathan: [00:10:57] On The Tape podcast. Dr. Doom. He has a book out called Megatrends. I think it just came out this week. So going to talk about that, I’m actually reading it and he was on a podcast, odd lots on Bloomberg with Joe Weisenthal and the headline from the transcript comes out. Nouriel Roubini Predicts A Crisis Worse Than the 1970s. And so he’s saying that the Fed. You ready for this? They won’t pivot. They’re going to wimp out. And so, Dan, you’ve actually been on this. Stagflation train since, I think summer of 2021, is that correct here? So really, I guess the question is he sees everything that you see any bear right now that the Fed is basically going to overdo it here. And what it’s going to do is they’re going to hike themselves to recession. But the point that I think you’ve been making all along is that the stickiest parts of inflation are going to be year over year. They’re going to be up a lot. They’re still going to be cut in half, let’s say, from their heights. But it’s the combination of slower growth, higher rates and higher inflation is the thing that puts us in the stagflation. And I guess when we talk about a crisis, I mean, he’s using the term a crisis, a stagflation, a crisis worse than the seventies. Are we likely to do that? Because the way I see it here, man, it’s like we always find a way. Don’t we always find a way? So are we going to be in a crisis? And you use this expression all the time, every crisis in our adult life as it relates to the financial markets and the economy has had to do with leverage. Where’s the leverage this time around? [00:12:18][81.4]
Danny Moses: [00:12:19] Well, it was sitting in the UK pension funds, which we’ll get to in a minute, but I think it’s more of unemployment is going to rise. It has one direction to go. And I think Nouriel was talking about obviously unemployment is going to rise much farther. I believe I didn’t see the entire podcast, but I know that’s what its current thoughts are. Then the Fed even understands, right, that when it starts to hit, mainstream layoffs are coming and that’s a death knell and that’s going to really slow the economy rapidly when that does occur. Just from a spending perspective, and I’ll say what I said at the opening of the show today, it’s always about the consumer. Dan to your point and to your point, the consumer in the U.S. has always been resilient. I will never forget after 911 how incredible it was people that fired back and came in. Yes, the Fed was cutting rates, but we came back from that COVID. We came back from that. It did cause a little bit more of this inflation, but that’s fine. But people do tend to come back for more. But that part, Dan, the disconnect between what the Fed believes their forecasts will cause and what actually will happen, I think that gap is where people like Nouriel Roubini and the Fed are not aligned and he sees it coming. I think I see that coming. It’s just logical that we can’t sustain that. So again, when there’s wage inflation, you have two choices. You eat it in your margin or you start to fire people. And I think what’s going to happen is you’re going to start to see unemployment rise. [00:13:28][69.7]
Guy Adami: [00:13:29] Started this podcast in the late 1970s with Neil Young. I turned 50 in 1976 and one of my joker friends brought me a Barbie betting post. You may recall her from Hee Haw. And that was like everybody got a chuckle out of that one. You know, 50 year old G Swizz was getting a Barbie Ben poster. But I find it fascinating. And her brother Dan has basically rules for tech investing. [00:13:50][21.5]
Dan Nathan: [00:13:51] Well, just really important so Dan Benton, who’s a good friend of mine. Okay. Now, not related to party. Okay. Dan was probably the most famous next to Rick Shirley in tech analyst at Goldman Sachs in the nineties. He went on to start Andor capital. He was a very successful hedge fund manager, but he came out with his list of 20 rules for tech investing, which was just passed around forever. And it’s still passed around. And Amanda will throw it in the show notes. And he’s been on the podcast. He was on okay computer a few months ago and he’ll come back here. But it was really interesting when I was thinking in our private chat, Daniel was hearing what you had to say about the Tesla earnings and what was going on in Twitter. I was thinking about Dan’s list. [00:14:29][38.1]
Guy Adami: [00:14:29] Of course, I will spare you reading all 20, but as Dan mentioned, we will post them in the show. Is that what they call show notes? Show notes, which is I love the fact that it’s pretty cool. By the way, I know who Dan Benton is as well. And Rick Saarland, by the way, was a Goldman guy when I was there. [00:14:43][13.6]
Dan Nathan: [00:14:43] He brought Microsoft Public in 1986. [00:14:44][1.3]
Guy Adami: [00:14:45] We actually should get him on the podcast at some point. But Danny, get ready for this because everything I’m about to mention is going to lead you down a primrose path. So. Dan Benton’s rule number one, not Barbie, sell technology stocks when estimates are being reduced. Danny, that’s something you talk about all the time. The best times to short them is when they’re way down in the first place. Rule number four Most technology stock ideas are product cycle stories. Rule number five New product cycles often lead to earnings surprises. Product cycle transitions usually lead to earnings disappointments. Rule number 20. Danny Moses Hmm. Don’t forget rule number one. Now I hear these things and it all comes down to one word Tesla. [00:15:34][48.6]
Danny Moses: [00:15:35] So in the hours leading up to the Tesla earnings release, there was two things that happened. One is Elon Musk tweeted, I will not let you down no matter what it takes. And the other thing that occurred was that the investor relations person at Tesla somehow contacted all the analysts that covered the stock and had them lower their adjusted earnings number hours before the print. So they ended up printing, I think, a dollar five or something. Who even cares does not trade on fundamentals. Before that the estimates were like a dollar nine. Somehow they were brought down to like a dollar to right before. So again, with this company, it’s all smoke and mirrors. So my other favorite highlights were as follows. Musk said during the call, You know, I’m going out of order here. I’m an engineer and a manufacturing person and a technologist. I think what he left. She’s also a chef or someone is a chef in there because they’re cooking some things in there because these things do not align like the operating expenses. Yes, I know there’s one offs that filled his option pool and all these things, but you can’t have growth like this without the commensurate growth in operating expenses. So something’s up there, accounts payable, whatever. They’re messing around there it is what it is. But the things that he said, I’m buying Twitter is what he said. So, Dan, you were right the whole time is going to end up having to buy this thing. And in doing that, he basically is going to have to sell 5 to 10 billion in stock. So, of course, he’s incented to drive his stock up and they cannot he cannot start selling for those people out there until they actually file their 10-Q, which is the legal quarterly report, which they need to file with the SEC which should be today. I would imagine that he’s going to sell stock. He made comments that he believes his market cap for the first time he can envision being the size of Apple and Aramco, Saudi Aramco combined. That would be, by the way, for those keeping score about $4.3 trillion. Right. So a lot of things that were so out of left field. But my biggest takeaway is what one of the rules, two or three rules you just mentioned, first of all, I’ll give it a little bit of a technology company, but this is an industrial company. This company requires massive CapEx, these plants in Berlin, which he said he’ll be unaffected by the energy crisis in Europe, which is horse hockey, as guy likes to say, the growth in Austin, in Texas, it just doesn’t make sense. And I said all along, I don’t know when it was going to be and if it’s now, I don’t know. But at some point when a stock starts to trade down, you start to look for reasons that it’s trading down. But more importantly, you want to know reasons to buy a stock. There are so many other better companies that you can buy this valuation, whatever earnings going to be, $4, $5. It doesn’t trade on earnings. It trades on this imaginary Robotaxi full self-driving is still in beta. It doesn’t exist. They’re going to deliver some trucks to Pepsi. Fantastic. The battery cell stuff. I had no idea what he was talking about. All I know is this. They’re going to be limited. They’re constrained in the supply chain. Still, commodity costs for the most part, lithium specifically are moving higher. I don’t have to look past it. So this game is going to be up very soon. I am confident that we have seen the highs in that stock forever. I don’t even know what the all time high was. I know we’re more than 50% off whether you want to pound it here or not. But one of those rules you just mentioned, I stand by and I talk about this all the time. Sometimes stocks are better shorts when they’re down 70 to 80%, when the bloom is off the rose and it’s crystal clear what’s happening versus trying to catch the top. And I’ll just leave it at that. So I make some of my rules in there Dan. [00:18:39][184.5]
Dan Nathan: [00:18:39] You know, it’s interesting. I mean, at its lows today, Danny, it was down 8%. It made a new 52 week low, split adjusted trading out to a seven. We’re into the close Thursday afternoon, the all time high on 11/4/21. That’s November 4th, 2021. So a little less than a year ago was 414. And if you look at this chart, it is the mother of all head and shoulders tops with 200 being the neckline. So it is holding on for dear life. And I just want to correct one thing. In the summer I thought he was going to be forced to buy the company. I no longer think and I know we’re a week away from the Delaware judge’s deadline of October 28th when they’re going to go back to trial if they don’t have a deal. I don’t think it’s happening. I’m just telling you, I don’t know anything that anyone else doesn’t know or whatever. I mean, to the point now that one of the reasons why the stock is down so much of late is that people who committed to the equity in April when the stock market was much higher, when interest rates were much lower, when valuations were much higher, they don’t want to commit equity to this thing anymore. They know it’s a dead bang loser. He even admitted that he’s paying too much for it, but it’s a really interesting opportunity. The people with all the debt. Yeah, their banks and I know they’re committed to it. They don’t want to lose billions of dollars on that debt. I just don’t think it’s going to happen. The last point I’ll just say is that you said he’s a chef. This was a quote from the conference call that you’re referencing, Danny. He says, I’m not an investor. I’m an engineer and a manufacturing person and a technologist. Well, interestingly, I think he thinks he’s like a rocket scientist. He is not. His little foray of late into geopolitics. He’s not a political scientist. Okay. But the fact that he’s not an investor, I take issue with and I’ll tell you why he was a genius for years. He bought on every secondary that they ever did and every convert they ever did. So the company went public in 2010 and last year he started selling. Remember that tweet, Danny? It was like literally he ticked the high tick on that. He tweeted, Should I sell stock to pay taxes or whatever? The Fugazi. And he’s been selling tens of billions of dollars the whole way as it’s been cut in half. And then he floats out that they might buy five or $10 Billion of stock back. This is a 600 billion plus market cap company. That’s like a drop in the ocean. So I just think, again, he knew exactly what he was doing. I thought you’ve said this, Danny, that the whole Twitter gambit was an excuse for him to sell stock. He never wanted to buy it. He thought he’d get out of it. And now he has to buy it, and he’s overpaying it by probably 25 billion. [00:21:08][149.1]
Guy Adami: [00:21:09] Danny Moses you should actually go to the World Series of Poker because you’re one that will not overplay your hand the same way Matt Damon did not overplay his hand against John Malkovich in the great movie Rounders. I would submit, and whether I’m right or wrong doesn’t matter. It’s my opinion that one, Elon Musk completely overplayed his hand and now he’s paying for it on the back end. Let me just say this, Danny Moses, when nobody was talking about companies like Carvana and all those things financing companies, you were talking about them. You were pointing them out. You were bringing them forth into the light at the on the tape podcast. Well, guess what we used to call Aluminum Ally back in the day. I don’t know if you you know, I don’t know if there’s a good Segway or not. But there another company showing some of the bloom is off the rose in these financing companies. And you brought it up to sort of create awareness and it’s all coming to fruition Danny Moses. [00:22:04][55.1]
Danny Moses: [00:22:04] Yeah, and all roads lead to Carvana still did so Ally Financial, which at one point was GM’s finance arm, so spun out years ago. They are an auto finance company. ALLY is a symbol, so the CFO resigns the day before the reporting earnings. If that wasn’t a red flag going up into the air, a larger zero four losses, they obviously missed numbers. They have a $2 billion loan to carvana for floorplan financing of which deutsche bank wonderful has 200 million out. To them, it’s like an 18 month loan. So they actually said on the call, the CEO said he is watching Carvana closely. Meanwhile, the debt for Carvana, which is really what I was harping on months ago, he said, if you like Carvana, don’t buy the equity, buy the debt. Now it’s in the thirties, forties, $0.50, whatever it might be. But again, to the underlying within the economy, what’s really happening kind of in subprime auto if you want to call because Primodos is still fine, you’re seeing a slowdown in car sales as sort of inability to get into a car at a cheap price. Again, part of what the Fed is doing, obviously, raising rates is having an impact. And now you’re seeing in some of the banks that have reported, if you look at their auto segment, it’s getting worse. It’s only going to get worse from here. It’s not going to get better. And so something to pay attention to what’s going on in the real economy. So, yeah, I mean, we’ve seen CarMax in the last month now we’ve seen Ally. We’ve obviously in Carvana, there’s going to be others that continues follow suit. And so for those people out there that thought that used car prices would go up forever and a whole nother separate story, that doesn’t happen. And in general, we all know that being able to buy a car with 0% financing is much cheaper. And I’m watching average monthly payments for people that are now buying cars is up, I think over six or $700. That’s an average price of what they’re paying per month. And I think a year ago it was three or 400. So some to keep an eye on their Guy for the real economy stuff that’s happening. [00:23:43][99.1]
Guy Adami: [00:23:43] When you’re watching a sporting event, especially NFL football, you’ll be watching the Giants beat the Ravens. Oh, did I say that? We’ll talk about that later. And they always break in with an update of another game. So, Danny Moses, I want you to break in here with an update in the world of cannabis, because I do believe this week on the Squawk Box or one of those shows, the CEO of Green Thumb was on what’s happened since the great Brady cub broke into the on the tape podcast a couple of weeks ago. [00:24:09][26.1]
Danny Moses: [00:24:10] Yeah. Remember a couple of weeks ago, Biden announced federal pardons within the cannabis sector. That’s a step in the right direction. It gives Schumer and Corey Booker cover to bring this Safe Banking Act coming because they wanted a comprehensive criminal justice bill. So that’s good there. So we should get that. The same time, Biden asked for Health and Human Services to look at cannabis, to deschedule or reschedule the drug from a schedule one which is there with heroin and cocaine to something below is scheduled tw o were fentanyl said so let’s call it schedule three. Well as Brady says I believe in coincidence. I just never seen one all of a sudden Circle K, which is a very large convenience store chain slash gas station partners with green thumb bend cobbler who you pointed out was on CNBC talking about it to open ten Rise Express is Rise is the name of Green Thumb’s dispensaries in Florida. Now, Green Thumb needs to expand more in Florida. They want to open these dispensaries up. But for Circle K to do it, granted, it’s a separate entrance. It’s a whole separate thing for them to do. It tells me that the CPG industry and we know the alcohol industry knows what’s coming, so people need to start paying attention to things like that. We’ve seen noise and stuff here, but this is getting real here and so that’s another indication of where we’re headed here. So things are going to get more heated and excited I think within the cannabis space for sure Guy. [00:25:25][75.9]
Guy Adami: [00:25:26] As I mentioned at the top of the show, you’re very pedestrian, ten and eight. We will get your NFL picks in a second. But I feel that you’re a bit exercised as to what’s going on in the United Kingdom. Liz Truss lasted 44 days dead and our podcast has lasted significantly longer than the Liz Truss tenure as Prime Minister of England. It’s remarkable, but as far reaching impact and I think you want to sort of go on a bit of a rant here. [00:25:51][24.7]
Danny Moses: [00:25:52] Yeah, this is going to be a really short and sweet part, but she’s taken the blame for everything that’s been going on. She was appointed to replace Boris Johnson. She came in, she introduces this tax cut and spending plan and then all of a sudden the bond market goes haywire. Two things. The bond market was already on the brink, but she’s taking all the blame. If she had announced that and nothing had happened in the bond market, they’d be praising her. That’s the kind of economic growth that we need. That’s what we need to do. But because bond rates started shooting higher. Higher. She’s ousted. So it was QE all this time that forced yields down. But the pension fund managers have used leverage are taking none of the blame. And if there was no leverage in the system, there wouldn’t be margin calls. If there were margin calls, maybe this wouldn’t have happened. And so my whole point is they get Liz Truss out of there, but BlackRock, Schroders, Legal and General, they’re the ones that came up with these liability driven investments. These LDIs, we talked about this like a month ago, $1.3 trillion or something or $1.6 trillion in the market of these products. Total liabilities, obviously for the UK are 2.6 trillion. And basically what they did was pensioners obviously have to earn a certain amount. So the UK had to figure out a way to enhance their returns. So they started using these LDIs, which are these derivatives and repurchase agreements they lent bonds out so they could get cash back and use that cash again to invest in bonds that are riskier and riskier assets to create a higher return. But it’s Liz Truss fault because she announces a 40 to $60 billion type plan when this is a $2.2 trillion problem in the UK. So did she do the right thing? No. Was it a bad plan roll out? Sure. But why aren’t we talking about any of these pension fund managers that use leverage in the system to help kind of exacerbate this? And that’s my problem with the whole thing. [00:27:29][97.1]
Guy Adami: [00:27:29] And we will talk about that because that’s not over yet. I mean, we’re just sort of at halftime, that whole sideshow that is effectively the government, at least until recently, the Liz Truss government, the Bank of England. And oh, by the way, these pension funds, this still has a lot of runway, but I’ll say this not in defense of Liz Truss, but you can’t go in there playing checkers when the rest of the world is playing chess. She had access to the same information that you had and her messaging suck. [00:27:57][27.1]
Dan Nathan: [00:27:57] Can I just ask you this? So we keep hearing this, whether it’s people who come on our podcast or come on CNBC, you’re seeing everyone trying to sound really smart Danny talking about something’s going to break. They said they’ll point to the UK pension system that almost broke. So what does that mean to you? Because again, Guy still hasn’t seen the big chill. [00:28:15][18.2]
Guy Adami: [00:28:16] Can’t wait though. [00:28:16][0.0]
Dan Nathan: [00:28:17] We know the whole book, the movie. It’s all about a handful of people who saw something and were betting on something breaking. What could break right now in the financial system that could cause the sort of we just alluded to Nouriel Roubini talking about a stagflation area crisis. That doesn’t actually mean that the financial plumbing, something there has to break and needs to be bailed out. I’m just curious if you think about the sorts of things that could push the economy over the edge or the markets over the edge. We’re already seeing the craziest moves we’ve seen in decades in currencies and in yields. But the thing that catches, I think, the public’s attention is when the stock market perceivable crashes, and that would take an event at this point. So I’m just curious, in your big short mind, what’s the thing out there that’s most likely? And I’m doing air quotes to break because guy, you know what I’m saying? That people like to sound smart by saying stuff like that, but I don’t know what it means and it goes back to we always find a way is bad is oh eight felt it was isolated to eight no nine and by 2010 everybody was bullish again and if you were the bearish guy, you were just like the asshole. [00:29:24][66.8]
Danny Moses: [00:29:25] Listen. So let’s go back. It was $160 billion margin call equivalent over in the UK. Right. That’s what created this yields to move higher and so forth. Have having to post collateral. Right. So that was part of it. But Dan, let me just say everything’s broken. And what do I mean by that. Reliance on quantitative easing and central banks to fix all our ills? That’s over. We never fixed structurally the problems from 2008, nine and ten. It was never fixed. All we did was move debt and liabilities from consumer and corporate balance sheet to the government. [00:29:54][28.7]
Guy Adami: [00:29:54] And oh, when I heard that. Oh my God. [00:29:56][2.3]
Danny Moses: [00:29:57] Yeah. I don’t know if Guy made this old man once told me this stuff. [00:30:00][2.4]
Guy Adami: [00:30:00] I’m just saying. [00:30:00][0.2]
Danny Moses: [00:30:02] But in general that’s what we’ve done. So you want to tell me what’s broken when you have ten year bonds over in the UK, in the US moving 40, 50 basis point ranges in a day. [00:30:10][8.4]
Guy Adami: [00:30:11] Whoa, whoa, whoa, whoa, whoa. [00:30:12][1.0]
Danny Moses: [00:30:12] When you have Japan, let me finish this Guy. When you have the yen breaching 150. So people out there as a yen, 140 145 150, that means it’s actually getting weaker versus the dollar. What are they forced to do? They’re the largest holder of U.S. Treasuries. Do you think it’s a coincidence that they needed to intervene again to protect the yen and our ten year yields went higher? I don’t think that’s a coincidence. So we have this convoluted, connected, global central bank thing that’s been going on and it’s broken. And so, Dan, what will happen to me will be and you said it best until the stock market breaks itself. When I see it breaks, it starts to trade down and people start to look for a reason. We will see all the inefficiencies have occurred. And most importantly to me, the faith in the central banks is I think we’ve jumped the shark there. I think it’s over. And so without nailing down oh, is it reverse repo, is it something is going to crack? We see a little bit every day, but it’s the stock market Dan [00:31:03][50.1]
Dan Nathan: [00:31:03] You get what I’m getting at is that those people who are making the decision to sell stocks when they feel like the sense of fear because they keep hearing supposed experts talking about things that are breaking and things that are gone wrong for 15 years. They don’t really in generally I don’t. Understand all this stuff that much. So I guess my question now, though, Danny, is that you’ve been increasingly bearish throughout this year. And when we talk about the rally that we had into August, it seemed like in hindsight a gift. I think we were all jumping up and down looking to sell anything that wasn’t bolted on. And the fact that these rallies over the last month just really petered out after about five, 6% or something like that, that feels bad. So the question here is there’s something lurking out here in October. What is this? It’s October 20th when we’re doing this, a shout out. First of all, my wife’s nice round birthday. I’m like, oh, yeah. Happy birthday. Yeah, certainly. Mazel tov. Yeah. Mazel as are people say, well, it was the anniversary guy 87. You were 50 and 87. October 19th, October 9th. This was yesterday. There’s this whole notion that markets crash and they also bottom in October. Is there something lurking out right now between now and year end that could cause a ten, 15% precipitous drop in the U.S. stock market? [00:32:16][73.3]
Danny Moses: [00:32:17] Listen. I don’t know what it would be. Could it be a large financial institution in Europe that we’ve heard a lot about, a couple of banks over in Europe that could be in trouble. Sure. Could be something like that that we’re not paying attention to. [00:32:28][10.7]
Dan Nathan: [00:32:28] So can I just say one thing? But they get bailed out immediately. [00:32:30][2.2]
Danny Moses: [00:32:31] But again, bail out. Listen what you just said. We just saw what can happen when all the inflation that’s present globally right now, if you try to bail out, it will be perceived as an increase or fuel on the fire. [00:32:42][11.5]
Dan Nathan: [00:32:43] Or it could be a relief. Let’s just say hypothetically next week, just, you know, Credit Suisse, who I am a consultant to, they’re going to announce this big restructuring plan. I don’t know anything that anyone else reading the FDA, The Wall Street Journal doesn’t know. There’s a lot of rumors about there’s going to be a capital raise in this and whatever. Let’s just say they did a deal. It was like Bear Stearns into the hands of JPMorgan in March of 2000. Let’s say they wipe out the equity, but they put it in the hands of either a better bank with the government backstop. My point is that actually might be bullish, Danny, if you were, let’s say Deutsche Bank did it the next week or something, you know. [00:33:15][32.5]
Danny Moses: [00:33:16] Oh, it cleans something up, but you’re wiping out hundreds of billions of dollars of equity when you say that and then, you know, you realize you’re wiping out. So the answer is market caps will start to drop here. So I don’t know Dan what it is or what it’s going to be. I do know this these last few rallies in the market to me have been one about Bank of England coming to the rescue temporarily, Bank of Japan coming to the rescue temporarily. And how we started the show when I said Fed officials, Treasury officials have been talking to the banks about the plumbing in the system and they basically got the signal that they will be there to buy bonds if something were to happen. So all those things that we’re talking about are not fundamental reasons. And again, you’re right, will we get a massive rally when the Fed says we’re going to take our foot off the gas on quantitative tightening? Sure, you’ll get a respite, but that’s not what I’m focused on. I’m focused on the fact that anything that they do to come to the rescue, when I say they central banks will deem to be more inflationary and self-fulfilling. And that’s what we’re on the other side of here. And until we really deal with that and again, then I don’t know what it’s going to be. It’s going to be something in the plumbing. Listen, they stopped the bleeding in Bank of England on $160 Billion margin call. Could that happen again? Absolutely. Then who are they going to blame? So you’ve got to have your antennas up in this market again. And I don’t want to be overly bearish. Look at some of these companies which are kicking ass our pricing power, which are defensive by nature. You can own stocks in this market for sure and they’ll be great opportunities. So I don’t want to end it on such a bearish note. Then before we get to my NFL picks exactly [00:34:37][81.5]
Dan Nathan: [00:34:37] Which has been particularly bearish. [00:34:39][1.7]
Guy Adami: [00:34:39] Yes, four. [00:34:40][0.5]
Danny Moses: [00:34:40] Ten and eight. [00:34:41][0.3]
Guy Adami: [00:34:42] Which is not good. So as you know, I’m not the brightest bulb in the fixture. But let me just summarize a few things that Danny Moses said quickly. Danny mentioned that the liabilities went from the balance sheets of the banks to that of a central bank. Gee, I wonder where I’ve heard that before Dan Nathan. Then he said that currency and bond volatility is a bad thing. Dan Nathan I wonder why I heard that before just pointing it out. We’re hanging out too much. And by the way, just we’re in the late 1970s. I would be remiss if I didn’t point out that yesterday, as you’re listening to this, 45 years ago, the plane carrying the members of Leonard Skinner and their crew, the core of Corvair plane CV 240, I believe, crashed in Gilsburg, Mississippi, three days prior. Dan, as you know, Leonard Skinner released the great album, Street Survivors. I’d like to think of myself as a street survivor. See what I did there. [00:35:36][54.7]
Danny Moses: [00:35:37] That was really good. [00:35:37][0.5]
Guy Adami: [00:35:38] Thank you. Ten and eight is not good by your standards. I’ve really come to expect more from you. Ten and eight is pedestrian at best, and you’re not even paying for the vigorish. But you got another shot this week in a league where they play for pay week seven, if I’m not mistaken. Danny Moses, go ahead. [00:35:55][16.7]
Danny Moses: [00:35:55] All right. One or two last week. That’s because my two losses Dan agreed with on the show, and I said, Oh, God, I’m in deep, deep trouble. But there’s two games that stand out to me. Tennessee Titans in a rematch from just, I think three weeks ago at home against the Colts. Yes. Jonathan Taylor will probably be back at running back for the Colts, but Tennessee off of a bye week, they won some games in a row there lay in two and a half. I like Tennessee here. I’m not a believer in the Colts at all. Matt Ryan’s getting sacked too much. [00:36:20][25.0]
Dan Nathan: [00:36:20] I’m going to take the other side of that for a grand. [00:36:22][1.3]
Guy Adami: [00:36:22] Wow. [00:36:22][0.0]
Dan Nathan: [00:36:23] What? What am I down to you, Danny? My holdover from last year. I’m going to. [00:36:27][4.1]
Danny Moses: [00:36:27] Hold your 500th this year. You’re down on that piece, you’re down five, so you’re down 4500 bucks. [00:36:32][5.0]
Dan Nathan: [00:36:32] All right. So I’m going to take the Colts getting two and a half for a thousand. [00:36:35][3.2]
Danny Moses: [00:36:36] Wonderful. Wonderful. Okay. So you’re taking the Colts plus two and a half. You’re down on that. And then my second pick is Baltimore. The line keeps going up. I have it. It’s six. It’s now six now over Cleveland. Coach of Cleveland has lost the locker room completely. Baltimore obviously coming off the loss against the wonderful guy, New York Giants. Baltimore at home, I think closed this one out. And I think they step on the gas in the third and fourth quarter to not let the things which keep happening to them blowing leads in games in Baltimore, even six, snap or seven, I would take over Cleveland. Those are my two pick. [00:37:08][32.7]
Dan Nathan: [00:37:08] I’m going to take Cleveland for 500. [00:37:10][1.3]
Danny Moses: [00:37:11] I really got you angry. [00:37:11][0.6]
Dan Nathan: [00:37:11] Kind of an interesting thing that you just did there. Ravens, Browns and Colts. There’s a common thread there. [00:37:17][5.7]
Danny Moses: [00:37:18] Yeah, they’re all in Baltimore. Once more in Baltimore. Okay. I like it. Dan, it’s nice. I like it. So you have a thousand on the Colts plus two and a half. Yeah. And you have 500 on Cleveland plus six and a half. Yeah, I feel I wasn’t so certain, but I’m going to be 12 and eight coming next week and that’ll be a 60%. So I’m feeling good boys. [00:37:33][15.8]
Guy Adami: [00:37:34] By the way, if you playing our home game before we sign off this week, the Eagles of Philadelphia, the only undefeated team in the National Football League. I just want to point that out. To call New York Giants 5-1, just playing great football Jacksonville this weekend, which is not an easy game with Jackson in Jacksonville. It’s a trap game for the Giants. [00:37:52][17.8]
Dan Nathan: [00:37:52] All right. One quick thing here. We didn’t really hit a lot of the big tech earnings, but next week we have Microsoft and Alphabet reporting. Tuesday after the close, Apple and Amazon, Thursday after close. A lot of other stuff in between that I’m going to sit down on Monday afternoon with Gene Munster of Loup Ventures. We’re going to hit all of that, so please check it out. It’ll either be in the feed Monday night on okay. Computer will also put it obviously in the on the tape feed or at the very latest Tuesday morning. So check that out. [00:38:22][29.5]
Guy Adami: [00:38:22] And let me add one other thing. Hold on before you [00:38:24][2.6]
Danny Moses: [00:38:25] You guys are going big time on me on Monday. Go ahead. [00:38:26][1.4]
Guy Adami: [00:38:27] I was About to say on Monday. That would be October 24th at noon Eastern time. Sirius Satellite Radio. Am I allowed to say satellite radio do people say that? [00:38:37][9.7]
Dan Nathan: [00:38:39] It’s a satellite that’s how they get the radio. [00:38:40][0.6]
Guy Adami: [00:38:40] They have given Dan Nathan and G-Swizz the reins for one hour, a talk show, a call in show. So I encourage everybody listening to this to smash the like button number one, and to dial in 8449427866. I’ll say it again. 8449427866 an hour long radio show, Dan Nathan Guy Adami taking over Sirius Satellite for one hour. It’s going to be off the chain. [00:39:16][35.6]
Danny Moses: [00:39:17] I want to see what their subscriber growth looks like during and after that show. I think it will. I think you guys are going to help. [00:39:22][4.8]
Dan Nathan: [00:39:22] But first of all, I want to say one thing really quickly. If you’re listening out there and you want to listen to this, it’s on their business channel. I think it’s 132 or something like that. I saw some people tweet us, I don’t need another subscription. I will tell you this and I’ve said this on fast money. I’ve said it for years. I think Sirius Radio, the app, forget the little boxes that you could get and put on your desk or through the car. I think the app is one of the most under valued media assets out there. And I mean, that’s it. Seriously, they got Pearl Jam Radio on their Grateful Dead radio. All commercial three. Howard Stern. No serious. It’s never considered. They bought Pandora too a few years ago, but download the app, try it for free. Listen to Guy take calls on Sirius Radio. [00:40:03][40.9]
Guy Adami: [00:40:03] By the way, that’s Channel 132. I’ll say it again. That’s Channel 132 on Sirius. Then what are the kids say? It’s going to be flee. Do they say that? Yeah. Stick around. When we come back, Michael Kantrowitz, Dan calls them Kantro. I’m not sure. From Piper Sandler coming up next. CME Ad. [00:40:23][20.3]
Dan Nathan: [00:41:03] iConnections Ad. [00:41:04][0.8]
Guy Adami: [00:42:31] FactSet Ad. Michael Kantrowitz serves as chief investment strategist and head of portfolio strategies at Piper Sandler. His expertize includes identifying changing trends that influence business cycles while providing forward looking investment recommendations on global asset allocation, sector positioning, stock selection and portfolio construction. He was ranked as one of the top three portfolio strategists in the Institutional Investor magazine All Americas Research Poll in 2020. Michael, welcome to On the tape. So growing up, everybody has a nickname like Danny Moses would be DMo, right? Is that right or wrong? [00:43:12][40.1]
Danny Moses: [00:43:12] Yeah, that’s right. [00:43:13][0.4]
Guy Adami: [00:43:13] Yeah, that’s I deemed you that, by the way, I don’t think anybody calls you. [00:43:16][3.3]
Dan Nathan: [00:43:16] I was D-Nath. [00:43:17][0.6]
Guy Adami: [00:43:18] When. [00:43:18][0.0]
Dan Nathan: [00:43:19] In college,. [00:43:19][0.2]
Guy Adami: [00:43:20] So I would’ve called you net that if you’re Nate or Nate. Yeah. So if I grew up with Michael Kantrowitz, I would have called him like M.K. or something like that. Is that right? So you’re now M.K. for the remainder of this podcast, Michael, is that okay with you? [00:43:34][14.7]
Michael Kantrowitz: [00:43:35] All right. [00:43:35][0.1]
Dan Nathan: [00:43:37] Dude he already has Kantro. [00:43:37][0.3]
Guy Adami: [00:43:39] Yeah no, I understand that. But people call him Kantro so why would I do that? Yeah, G-Swizz does things a little bit differently here, by the way. That’s a name for like a linebacker at Penn State, Michael Kantrowitz on the tackle. So before we get into this, M.K., not Kantro, give us your background because I think people love to hear the back stories, how you wound up sitting here with the three of us today. [00:44:02][22.6]
Michael Kantrowitz: [00:44:02] Yeah, sounds good. And thanks for having me. It started 20 years ago to the day. [00:44:06][3.9]
Guy Adami: [00:44:07] To the day. [00:44:08][0.3]
Dan Nathan: [00:44:08] He saw Guy Adami on CNBC 20 years ago. And he’s like, that guy looks like he’s got a couple more years left in him. And look at who is still here. Yeah, you’re still here. [00:44:18][9.8]
Michael Kantrowitz: [00:44:18] So the short story is maybe not to the day, but it was 2000. So I graduated college at Binghamton University in 2000. 2 years prior to that in, I believe, March of 2000, which that date rings familiar to all of us. My older brother, four years older, told my father to put the small amount of money that he had put aside for me in a UTM account into the Merrill Lynch Global Tech Fund in March of 2000. Fast forward two and a half years later, I started working at Merrill Lynch, got that handed over to me. I think it was like 10,000 initially, down 75%. I think it was 2500 bucks when I got it, I was thrilled to get 2500 bucks. I didn’t have a dollar to my name and it really pissed me off like, why the hell did you lose all that money? And I didn’t grow up in a wealthy family. You know, my parents probably got the call center at best at Merrill, and it just lit a fire under me and kind of set out a goal for myself to figure out how the hell markets work and prevent people from losing money. [00:45:16][57.7]
Guy Adami: [00:45:16] Well, as it It turns out, you and D-Mo have some history together. What’s interesting there, m’kay, is history is repeating itself right before our very eyes because there are stocks that are down anywhere from 50 to 85, 90% and people don’t think history repeats. Well, it’s happening, Danny, right before our very eyes. [00:45:35][18.8]
Danny Moses: [00:45:36] Kantro, you worked at Merrill Lynch, you worked at Cornerstone. We know David Rosenberg, we know Carter Worth. You’ve been around some very smart people. You yourself were smart. We had Mike Wilson on here. And I promised myself when Mike Wilson turned bullish that I would also turn bullish. And I kind of missed it because you did on a monday morning at 5am I didn’t really have time to adjust my portfolio. It’s always bad when I people that are like minded come on the show. He just reinforces my bearishness. But I think the one thing you look at kind of summarizes where we are in the cycle is this hope trade that you have, this HOPE cycle, the housing and orders and so forth. Can you walk through that right now? Because I think that’s a great place to start. [00:46:10][33.5]
Michael Kantrowitz: [00:46:10] Sure. Yeah. HOPE stands for housing orders, profits and employment. And it really is the part of the cycle that does repeat every cycle. And I mean that, you know, it’s not often in our business we can say this repeats itself every cycle. Yeah, it doesn’t rhyme, it repeats. And that’s whether we’re heading into a recovery. Think of any bottom in the market, bottom in the economy. It always starts out with housing and every downturn in the economy also always starts out with housing. And this year has been classic housing. We look at leading indicators of housing like the NHB index that was at 80 the beginning of the year at 38. Now it’s having the fastest year decline in history. And so that data helps us inform where PMI is are going. PMIs are probably the second best macro data to get some insights into earnings market leadership stocks tend to trade with that data these leading indicators. And so that’s really been think about the last 12 months or so. It’s really been the housing data that’s weakened, the PMI’s data that’s weakened this year as we come into especially the back half of the year, we’re not to the point where the P profits are starting to slow and employment is coming up next in 2023. So this helps really guide our framework and methodology because again, it plays out every single cycle for the same reasons. Sometimes the leads and lags aren’t identical in terms of yes, sometimes it’s 18 months between one letter in the next, sometimes it’s nine months, but it’s always the same sequence. And so our bearishness just keeps growing, unfortunately. One, because the problem by housing slowing at higher rates keeps getting worse. Think of a set of dominoes. We keep creating problems at the housing part of the economy. It’s going to continue to spill over to the rest of the economy. I think that’s the main reason. And the second reason is just we’re seeing it play out as it always does. [00:47:59][108.2]
Guy Adami: [00:47:59] Now, what do they say Dan Nathan? Don’t they say about imitation, it’s the greatest form of flattery. Is that right? That I get that correct, because usually I screw those things up. Imitation is the greatest form of flattery, correct? Yeah. You may recall Dan Nathan, it was two years ago or so around this time that 22 that Melissa Lee came to me and said, What’s your trade for 2021 Guy? And I said, It’s what? [00:48:22][22.8]
Dan Nathan: [00:48:23] The HOPE trade. [00:48:23][0.3]
Guy Adami: [00:48:24] Excuse me? [00:48:24][0.3]
Dan Nathan: [00:48:24] The HOPE trade. [00:48:24][0.3]
Guy Adami: [00:48:25] The HOPE trade. It sounds familiar. [00:48:26][1.0]
Dan Nathan: [00:48:26] Home Depot, Oracle, Palantir. Expedia. Yeah, I remember it like yesterday. [00:48:30][3.6]
Guy Adami: [00:48:30] And I will tell you, Dan, as you’re looking at me, those all but Palantir did extraordinarily well. So I would submit that MK sort of took a page, Danny Moses, from the G swizzle playbook in his hope trade. [00:48:42][12.1]
Danny Moses: [00:48:44] Hope is a dangerous thing. I mean, we’ve quoted Morgan Freeman before, but let me ask you a question, Kantro, because retail flows and I know you’re just as miffed as I am, when are they going to start to turn negative? What is it going to take for people to stop plowing money into the market? Because the end of the day, it’s about supply and demand and people want to believe what they want to believe. What do you think will be the factor that kind of wakes people up? [00:49:05][21.4]
Michael Kantrowitz: [00:49:06] I think it’s earnings and then ultimately employment. Bad things happen in our economy when employment goes, you know, the things that we’re seeing around the world today are really a function of higher interest rates, the problems in Japan, the U.K., housing in the U.S. this is going to get real when it turns into employment losses. That’s when people are forced to sell their homes. When they have to, they’re forced to substitute their demand. And I think that’s really important in this bear market this year, because there is something that hasn’t happened this year. And I feel like many investors may be kind of overlooking it. The equity bear market really started off being a victim of the bond bear market. It’s not been about earnings or employment, which if you think about 2000 2007, 1981, keep going back in history, all those bear markets started off with earnings estimates and earnings falling and employment weakening and claims rising. The first six months of this bear market in equities is 100% PE compression, predominantly due to higher rates. And so what we’ve been hearing and pushing back against all year is this idea that especially in the first six months, the market was going down because we were discounting a recession. I think that’s absolutely bullshit. Yes, the market’s down. But if you look at the leadership in the market, the first six months, the year value outperforming growth, that’s not what you see in an economic downturn. Pricing in a recession, it’s all been about rates. And really the scary thing is that when you look back at every single cycle, it’s the move in rates that is the leading indicator with about a year, year and a half lag on the move in profits and employment. So we’re far from this being over. And when we think about when is this bear market economic story going to end, first, let’s get rates down or let’s first get rates stop going up. That’s the starting point to starting to pencil in down the road, a recovery which begins with housing, PMI and so on and so forth. So the most dangerous thing you can do today is look across historical analogs and say, well, the average bear markets 13 months stocks on average fall about 30%. The levels of bearishness today are consistent with past bottoms in the market. In fact, I challenge anybody to look, pull up any sentiment data. And I like to look at the Global Fund Manager survey that Bank of America publishes all over Twitter every month. Look at all the peak dates of the trough dates and whether it’s cash levels or bearishness, all of them line up with economic recoveries. In other words, it’s the markets that drive sentiment, not the other way around. It’s the economy that drives the markets. So it all goes back to the economy. [00:51:31][145.0]
Danny Moses: [00:51:32] So when you say rates, are we talking about Fed funds that the Fed controls? Are we talking about long end and market forces? And to that point, when will the Fed start to care? Is it when bonds reach a certain level or is it when the stock market drops to a certain level, which this Fed put that’s kind of around? [00:51:45][13.4]
Michael Kantrowitz: [00:51:46] I’m talking about long rates. Initially tightening always starts with long rates going up well before the Fed starts to tighten the short rate or the policy rate. And that typically is why housing slows through mortgage rates. So the ten year bond yield has been going up for a while, obviously. And so the way I like to look at it and again, a unique aspect of today’s that should go back to the end of 2020. That was the high tide in global leading indicators. PMI’s certainly ISM they all kind of peaked around the first quarter of 2020 one fourth quarter, 2020. And so if we count now from there through today, we’re sitting at 421 on the tenure. That’s nearly 22 months of rising interest rates on the ten year and falling PMIs. The longest time in history of rising interest rates and falling PMIs. Think of it as stagflation or tightening into a downturn. The longest period is 25 months. And that was in 1968 through 1970, which was followed by a recession. So maybe there’s only three more months left of this and something’s going to break. But I guess your question, Danny, what’s going to make the Fed stop if Powell said he wants to get real rates across the curve? Well, positive territory. So we’re getting close to there. But ultimately, no, I don’t think it’s the stock market that’s going to cause the Fed to pivot. I think it’s never the stock market. I think it’s going to be it’s going to be employment or something breaking. In fact, if you go throughout history, get this, that the Fed has always cut rates before core CPI has peaked every single time. And why? Because core inflation I my HOPE framework. It’s not just housing orders, profits, employment. There’s also some other data in there. The last one is actually core inflation. So by the time core inflation rolls over something, something’s already broken. Claims are already up two, three, four or 500,000. And so we don’t think we’re going to see a sharp deceleration in core inflation, because a lot of it’s due to the strength of the labor market, the health of the consumer. Yeah, rent matters. But core inflation ex rent is also hit a new high. So I think something breaks before inflation comes down. Or another way to say it’s always about something breaking. It’s never about inflation coming down. [00:53:56][130.7]
Dan Nathan: [00:53:57] So, Kantro, you mentioned that you’re getting increasingly bearish. How did you come in this year? Because, again, we know that the ten year had starting to rise before the Fed started raising Fed funds. They said that they were going to basically get a bit more hawkish, but they didn’t actually raise rates until March. Stock market at that point was already down ten, 12% from its highs were down about 22% now at the lows last week, I think were down 25% or so. You have a year end target in the S&P to 3400 over looking at your HOPE trade, the profits don’t come through at least as far as Ford guidance is the way people are thinking about it. The S&P is going to overshoot really quickly because we’re going to have analysts, strategists starting lowering their estimates for the outyears pretty quickly here. So thoughts on the S&P 3400 this year. What do you got for next year? Where’s it going? [00:54:43][46.0]
Michael Kantrowitz: [00:54:44] So we got a lot of things right this year. We didn’t get everything right this year. We started the year actually in a risk off fashion because our framework is around PMI and when you’re at the peak and looking at the downturn of PMIs, you want to go risk off. That doesn’t mean stocks necessarily always go down. It just means that that’s where growth starts to work, where investors focus on quality. It’s typically where value and data underperform. And so we came into the year and as a firm we had a view that inflation was going to be transitory. And so we came into the year risk off, but not nearly as bearish as I wish we were at the start of the year if we knew the future. So we pivoted. My team pivoted in early March, did a conference call and said, Forget about inflation right now, forget about interest rates. They’re probably not going to peak soon. Inflation is clearly not anything other than the war happened. So a lot of things kind of added fuel to the fire. Our message back in March and still today is that, yes, inflation is a problem and it may last for longer than we think. But really, we got to start thinking about is the next knock on effect of higher inflation and higher rates. And that’s where we start talking about housing. PMI is going down. And so that was in March. In May, we put out a 3400. So in March we downgraded we pushed our target down to 4000 and then May the first week in May or second week in May, we kind of went really bearish, dropping it to 3400. I got a bunch of emails from clients. Wow, he’s so bearish and kind of laid out the story as we saw it from here and then in August did another conference call. I’m just going to give you the big milestones this year. We’re basically said sell everything. My career is 20 years old, studied tons of history, tons of cycles, all macro, all day. And I’ve never seen a market that I wanted to short as much as I did in the middle of August. And all throughout August, I was publishing nearly every day just debunking the bullish push back. We had stuff technicians were talking about this Fibonacci retracement. We retraced half the bear market. That means we’d never go to a new low. And again, I call bullshit because if you look at the table, there’s a bunch of them on Twitter. Every single bottom in those examples was an economic bottom, was a housing bottom, literally every single one of them. And that obviously was not the case whatsoever. And so we were screaming investors first week August. This is the best opportunity you can get all your short. [00:56:59][135.4]
Guy Adami: [00:56:59] Yeah. And that’s a hard call to make in the seat that you sit in. We talked to Mike Wilson a couple of weeks ago who made a similar call. You guys have been in lockstep and you’ve been right. I mean, the S&P did get down to 3491 and as we say, close enough for government work. But I don’t think we’re done yet. But you mentioned the Fed’s not going to flinch until something breaks, and I don’t think it’s the S&P 500. I think if there is a Fed put, it’s probably around 3000 or so, which is significantly lower than we are now. But it’s a come in the form of the credit markets. And I will tell you, although the HYG has rolled over LQD, there’s no real signs yet that there’s something catastrophic going on in credit. Now, I happen to think it’s around the corner. I’m not suggesting I’m going to be right, but to me, credit is really the thing that’s going to get them the reverse course. What are your thoughts on that, Michael? [00:57:46][46.5]
Michael Kantrowitz: [00:57:47] 100%. And again, that’s the aspect, I think of this first six, nine months of this bear market. You know, why aren’t we seeing more higher readings in the VIX? Why are we still seeing people in the restaurants going out to dinner? Why why is consumers still spending? Why are earning still good? It’s too early for the big sharp decline in earnings, right? It was too early. You know, as we’re getting there every quarter, we’re getting closer to that. But again, this is a bond bear market that we’re in where equities are the victim. So you can’t look at those past analogs so. [00:58:15][28.3]
Guy Adami: [00:58:16] Yeah, you know, I don’t mean to stop you here, but I’m going to say you’re right. Equities are the victim of a bond bear market. Equities were the beneficiary of the nonsense that was going on for the 13 years prior. So people will say, oh, the Fed’s make a mistake, that blah, blah, blah. What they fail to mention or acknowledge or point out is the fact that for 13 years prior, one of the main drivers of equity markets were exactly that, an overly accommodative Federal Reserve and I would submit a reckless one [00:58:46][30.0]
Michael Kantrowitz: [00:58:47] Agreed I used to think of central bank activity in this goes back 1520 years when I first had this thought you can play ride racer grown up on a Nintendo. [00:58:54][6.6]
Guy Adami: [00:58:54] I know Dan did I played Speed Racer when I was a kid and as Danny will remember, Danny, remember this Racer X who used to come in from time to time was his brother was his brother. I mean deep shit back then and speed racer anyway. Michael, please continue [00:59:09][15.0]
Michael Kantrowitz: [00:59:11] RC programs not a great one. [00:59:11][0.2]
Guy Adami: [00:59:11] No, but I’d say listen, Different Strokes, you know. [00:59:14][2.7]
Michael Kantrowitz: [00:59:15] The analog to that is oftentimes in those video games, you steer to one side, you try to get back to the middle and you oversteer the other side and then you try to get back to the middle. Then you oversteer. It’s exactly what the Fed’s been central banks have been doing, probably going back to the LTC crisis. [00:59:28][13.1]
Guy Adami: [00:59:28] Yeah, and they’ve been doing it when the guardrails are up. And now we’re getting into an environment where there ain’t no more guardrails and we’re seeing it with the Bank of England. Liz Truss steps down. We’ll talk about that later. I mean, all kinds of crazy stuff. [00:59:39][11.4]
Michael Kantrowitz: [00:59:40] I agree. And so there are numerous exogenous shocks that are hitting the global economy today, numerous things that we’ve never seen before. I’d definitely say there’s more cross-currents today than ever. And yeah, when I think about what are the potential for a bear market rally, I’ll take an inventory of all the problems around the world because any of those problems start to get solved in investors minds. That will cause a little bit of a rally even this morning. I mean, it’s such a small change. But Liz Truss going away market rallied on that news in the morning. Is that going to solve the global economies problems? No. So it’s not going to turn this into a bull market. But there are many, many issues around the world that are going to continue to cause a lot of volatility. But at the end of the day, all of these issues, it comes back to the economy, earnings and employment. [01:00:21][40.6]
Danny Moses: [01:00:22] Kantro I was just going to say so you know, the economy is not the stock market, the stock market’s not the economy. But over a long period of time, the two should converge. And the guy’s point about money has been easy for so long. The quality of the earnings that was done from issuing debt and then buying back stock with it, or M&A, being able to acquire companies with cheap debt, those type things have been happening. Have you looked granularly at kind of where earnings growth had come from prior to now? Because it’s just going to get much harder and the comparisons are going to get much harder in. The last thing I’ll say is you’ve seen a few cycles, you start it. It’s always good to start in like a bad environment in 2000, 2001, 2002. So you can always kind of appreciate what can go wrong, but I just don’t think people really appreciate what it’s going to be like to be in a, quote, normal credit environment and what that means to stocks. [01:01:06][44.2]
Michael Kantrowitz: [01:01:07] Yeah the only thing I disagree with there, Danny, is the word normal, the use of the word normal. I don’t think there is a normal. Let’s look back in every decade. Go back as far as you want. The war to the fifties, very, you know, suburbanization, the sixties, you get kind of more that baby boomers, the seventies and eighties you know massive inflation and then eighties and nineties, massive disinflation. Consumer Funds How to use their credit card. 2000 China joins the WTO. We all use our houses as ATM piggy banks. And then the last 15 years of QE, you know, so what? You know, tell me what normal is and I’ll tell you what that’s going to look like. And so, yeah, if you think about big picture, yeah. With the last 15 years, it’s been central banks that have kept the financial markets in the global economies growing at the rapid pace or to the extent they could prior to that though I would argue we saw the same thing from the U.S. consumer. There’s been since the eighties this. Excess demand in the eighties and nineties that came from the US consumer. As people binged on debt, as we saw rates go from the high teens down to single digit numbers. And then China and Europe joined the party. China joined the WTO. The Eurozone became one big monetary union, took out risk. And that just led to obviously the end of the biggest global debt bubble in history and then came in the central banks to start the next big debt bubble in history. And all the while, federal governments or governments around the world are cleaning up each one of these messes. So as we look ahead, what’s going to drive earnings to be anywhere near as strong as what we have seen in the past 30, 40 years are really, you know, the 1880s and 2000s was a big earnings boom from all that debt. And the last 15 years, it was a massive expansion from all the central bank easing. So we’ve had really two big regimes since 1980, since I was born. One was earnings driven, one was p e driven. I think going forward is really who’s going to step up? Is India a country like that? No, I don’t think so. I think the consumer, though the balance sheet looks healthy, is not the same consumer back in the eighties and nineties. So yeah, I think we’re going to be in a more of a volatile macro and market environment going forward. I think you’re going to separate the winners and the losers more clearly, and I’m actually excited about it because again, I think it’s going to continue to be challenging. And I think as long as we keep up the good work, we’re going to separate ourselves from others that hide behind bull markets. Any research looks good in bull market. [01:03:26][138.9]
Danny Moses: [01:03:27] Correct. I would say one thing that’s kind of happened here is that we came out of COVID and obviously we saw an explosion in services because people were just going out again. And so it clouded what was going on behind the scenes, which is what you just described, which was the shift from the consumer corporate balance sheets to government balance sheet, central banks that happened 13 years ago that were now coming full circle, that now we’re going to finally pay the price. Because I’ve argued for a long time that we never really cleared prices in that market, and now it seems like it’s going to happen. So I totally agree with you on that. I just think no cycles are the same as I’m sure you would agree, but they often rhyme. And when it comes down to behavioral finance, I think that’s kind of where we’re going. I think you’re spot on, whether it’s a good thing or not for you, I don’t know. But I totally agree with your entire mindset here. [01:04:11][43.9]
Michael Kantrowitz: [01:04:11] Again, I can sleep at night because calling the economic data and some of the trends in the march and the eco data and the macro data are easier than calling on how the market’s going to respond to that economic data. I mean, the last four months, the worse the data have been, the better the markets have responded. So that brings in fear and greed and behavioral finance into part of this, which is obviously going to play a huge role going forward, which is why, you know, the market goes up for two days and everyone’s calling a bottom. But our framework, this HOPE framework, has been proven to work all throughout history, all throughout regimes. It makes sense, which is always the starting point for this stuff. And so yeah, we believe we’re absolutely heading for recession last year. There’s three things that have preceded every recession. Obviously in the first one is a Fed tightening cycle. We’ve always had a tightening cycle. Every recession was preceded by a tightening cycle. However, every tightening cycle was not followed by recession. Okay, so what’s the difference there? So there’s four times that’s happened, just happen in 2019. Fed tightening for a couple of years, no recession. Yeah, we had COVID, but look at any of the macro data. Housing bottomed in January of 19. PMI bottomed by the third quarter. The global economy was rebounding in 2019. And as soon as you see housing bottom, the recession odds go to zero. So that was the last time before that 1995, the Fed tightening in 94, before that 1985, the Fed tightened in 84 and before that 1966. So those years, 66, 85, 95 and 2018 into 19, why didn’t the Fed tightening cycle lead to a recession? I think there’s two reasons, and these are the two reasons we have today, why I think we are heading to recession. Number one, just pull up a chart of PCE, food, energy inflation. If you look at that, going back to 1950, the four times the Fed tightened and no recession followed. PC energy, food, energy, inflation ever got about 5% every other time. Every recession, we saw that go well above 5%. Four months ago, we hit 22%, the second highest number in history of PCE, food and energy inflation. The third factor, which again was not present in those four episodes that were not followed into recession but were present in every recession, is that central banks were tightening lending standards. They were not doing that in 2016, 17 18, we look at the Fed Senior Loan Officer survey comes out every quarter. We should be getting the fourth quarter any week now from the Fed. And if you look, while the Fed was hiking in 16, 17, 18 banks were easing. So the Fed was raising rates. Banks were easing lending standards. Same thing in 1994, 84 and back in the sixties, all the recessions, including today, we have banks that are aggressively tightening lending standards. Crazy thing is that. I can remember the last time. I don’t know when this has happened last. The Fed’s tightening into a clear and present massive global slowdown in the ISM at 47 the Fed still tightening, and you’ve got banks that are tightening lending standards very aggressively if you look at the data. And so you get the compounding of raising rates, tightening lending standards, and a broad based increase in inflation. There’s your three ingredient recipe to every single recession. Keep it simple. [01:07:22][190.2]
Dan Nathan: [01:07:22] Well, it’s interesting, Mike, that you’ve laid out really clearly it’s going to become consensus soon as you see a lot of strategists start coming around. And at some point, you just mentioned how sentiment is. We talk about this VIX that is stuck at 30 and above. And what that says to me especially is how orderly a lot of the sell offs have been in the stock market relative to what we’ve seen in FX and in the credit markets and in yields. It seems like the smart money as it relates to stocks, they’re kind of paired up, they’re negative and they’re hedged up. So my question to you is, what sort of push back do you get from those who don’t have the ability to hedge that are kind of geared long anyway? What kind of pushback do you get because you’re early on? This call, like I said, is going to become consensus at some point, but when it becomes consensus is probably very close to when the stock market bottoms. [01:08:09][47.0]
Michael Kantrowitz: [01:08:10] So again, there’s a number of different ways we think about market timing. And I think, yes, there’s an unknowable future and we’re never going to know exactly what’s ahead of us. But we can think of probabilities and we can use history and we can get an idea of what are the odds of things are going to get worse, are going to get better. Sentiment and valuation are not very big, important parts of our framework because I think those have extremely inconsistent track records of timing. The market valuation is essentially useless right now because what’s the earnings number? Nobody knows. And we know that nobody knows because we look at the dispersion of analysts estimates and it’s skyrocketed the last six months. It’s all over the place. So the P is only as good as your confidence on the E, which I would say confidence today is pretty weak and it’s going to get worse. Sentiment Yeah sentiments important, I think in especially in the short term, you know, positioning and sentiment, you know, the all these bear market rallies, all these moves, we don’t really focus on the week to week, not even the month to month. You know, we try to get kind of the next three months and beyond there because that’s where I think you can find consistency and conviction. The idea that everyone’s going to be bearish or everyone is bearish today doesn’t make me question my view whatsoever because I don’t I think, you know, you know what I say to them. I said you should be bearish, so you should be bearish. I mean, can you put together a better macro, worse macro story than we have today? I can’t [01:09:29][78.6]
Danny Moses: [01:09:29] Kantro. So I was institutional equity sales for years and Steve Eisman was our analyst at Oppenheimer. And as a salesperson, you see who comes to the podium on a monday morning or Tuesday morning for the research call, you say, Oh, my God, I’m going to have to make that call to some of my clients. And so credit to you and for Piper for letting you do everything that you do. Because we all know in this business, being short and wrong can end a career quickly, obviously, and being long and wrong people tend to get hired. But when you communicate with like your salesforce on a monday morning and they got a call, a mutual funds and hedge funds. Tell me how that goes. Do they look you in the eye first before you get to the podium like, no, no, no, no, can you walk me through that? Because I don’t think people understand that process of how you get to talk to some of these accounts and stuff. [01:10:11][41.5]
Michael Kantrowitz: [01:10:11] I think a big part that differentiates me from many strategists is, again, bulk of my career in the strategy side. I left Merrill in ’07, has been at boutique shops that were not dependent on banking. You got paid for your research and you were wrong. You got dinged that quarter, you were right. Hopefully you got rewarded. And so that’s been the environment most of my career has been in, which I think kind of puts a greater level of stress and greater expectation of performance on that. When you can eat what you kill, that motivates you. So now that I’m at Piper yeah they’ve been great, you know, they said so Piper bought Cornerstone Macro. The deal closed in February of this year and they said, keep doing what you guys are doing. So it’s fantastic. And kudos to the management team there for allowing us to do what we do best and not pushing any biases to promote banking or any any kind of nonsense like that. So it’s not a comfortable call. Yes, you’re absolutely right Danny when you’re bearish and wrong, you get destroyed because clients think you’re rooting against them. You. Yeah, especially the long only clients. They think, you know, you want them to fail. And that’s just that’s a shitty kind of backdrop. And so when you’re bearish, you better have a solid story. It better not be, it just be. The market’s expensive. [01:11:21][69.6]
Guy Adami: [01:11:23] Uneasy is the head that lies the crown. Danny Moses and I got to tell you something, Kantro. I use the mantra one that time. Dan, you’ve done a great job. And, you know, when you make calls like that, you set yourself up, but you’ve set yourself up extraordinarily well. So we want to thank you for joining us here on the tape. [01:11:41][17.8]
Michael Kantrowitz: [01:11:41] All right, guys, I appreciate it. And I’ll tell you what I’m looking for, real simple. And it’s because every single bear market ends this way. Look at any bottom of any bear market going back to the forties. Housing starts. Bottoms. The month or the next month at most. The third month after the market bottoms. From 1985, you can use the NAHB index. The NAHB index bottomed in February of oh nine before the market. How about that? NAHB index bottomed in January of 2019. So when we’re getting close to a bottom in housing data, which we could we couldn’t be farther from that. Today, with mortgage rates at new highs again, we will be as loud as we are today. On the bullish side. [01:12:24][42.9]
Danny Moses: [01:12:25] I will tell you, we just told that story with Portrait of anyone, Tony. Chris Renzi, who’s now at PIMCO from when he was a miller Tabak, came into our office in March 2009, sat with the four of us and said, housing starts actually can’t go any lower than they are now. There is absolutely zero chance we can get the hell out of here. That was the bottom of the market that day. So I totally agree with you on the housing start stuff. So thanks, Michael, for coming in, buddy. [01:12:48][22.8]
Michael Kantrowitz: [01:12:48] All right. Thank you, guys. [01:12:49][0.5]
Guy Adami: [01:12:50] Thanks once again to CME Group and AI Connections for sponsoring this episode of On the Tape. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we love hearing from you can also email us at on the tape at risk reversal.com any time. Follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [01:13:14][23.5]
Dan Nathan: [01:13:14] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed by me and Nathan Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [01:13:14][0.0]
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