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On this episode of On The Tape Dan and Danny discuss Fed Chair Powell’s speech this week (1:50), December volatility (5:30), what could happen when China reopens (12:30), retail stocks (15:24), Salesforce (18:00), the CNBC Sam Bankman-Fried interview (22:45), tether (26:45), and Danny’s NFL picks of the week (33:20). Later, Guy and Danny interview Alfonso Peccatiello, Founder & CEO of The Macro Compass, and talk about similarities between the stock market now and 2001 (42:25), what’s next to break (), the correlation between copper and gold (51:20), stagflation (55:40), what can go right (1:03:45), and the Macro Compass (1:05:40).
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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. Alright welcome to On The Tape. I am Dan Nathan. I am here with my co-host, Danny Moses. Danny, how are you? [00:01:27][56.6]
Danny Moses: [00:01:28] I’m good, buddy. How you doing? [00:01:29][0.8]
Dan Nathan: [00:01:29] I’m good. We’re going to have to do this one without Guy Adami. He gave us, what, an hour’s notice or something like that. No no emergencies. No one worry. He’s all good. [00:01:37][8.0]
Danny Moses: [00:01:38] But you can put away your bingo cards right now because you’re playing bingo for us. You’re going to lose. You’re not going to fill any cards so. [00:01:43][5.2]
Dan Nathan: [00:01:43] And by the way, Guy was on an interview with you and Alfonso Peccatiello. He’s the founder and CEO of the Macro Compass. You might know him as the Macro Alf on Twitter. He writes a really great newsletter, and he joined Danny and Guy for a conversation about what the Fed’s been up to and what the likelihood of a recession is and what he’s looking at. So stick around for that. But Danny, we got to start out by talking about yesterday’s reaction to what Jay Powell said. He was at the Brookings Institute. This is an annual thing that the Fed chair does. The transcript came out. I’m looking at the headlines and I’m like, Nothing new here, man. And then all of a sudden it looks like algos are reading this thing and the market starts shooting higher. I just did not see anything that we didn’t expect. I didn’t see a tone that was different than what we expected. So I’m just curious, what was your take on what he said? And then let’s talk about the market reaction, because stocks did one thing and yields did another. [00:02:43][59.3]
Danny Moses: [00:02:43] Yeah, I would say that all it really did was confirm that they’re going to go 50 basis points in December instead of 75. It wasn’t too long ago that 50 bips was a dramatic hike, but let’s just leave it at that. And I went and looked at the intraday CME Fed fund futures and it went from a 70% probability of 50 basis points to an 80% probability. So in that little 10% move and let’s remember earlier in the week, we had a lot of Fed governors out there being very, very hawkish. So the setup was I guess it couldn’t be any more hawkish than it was. It was a very kind of relaxed atmosphere. It was a combination of like a press conference that he normally has following all of their meetings and kind of a preview. So that’s an intermezzo between the two meals that we got, the previous Fed meeting and this meeting coming up here on December 14th. So it didn’t change that much then. I think there was a little bit just acknowledgment again that he was wrong about transitory, that he wants to be right about this and we’ll go a little bit more than ease to it just to prove that he’s right. But he acknowledged that we’re seeing some signs that things are slowing on the inflationary side. But then again, when asked and pressed upon, do you think we’ll have a soft landing, he still thinks he’s going to manufacture a soft landing, was my takeaway. So we’ll push this out another couple of weeks here until we go to the real Fed meeting. [00:03:52][68.5]
Dan Nathan: [00:03:53] So that’s a really important point. And my takeaway and I’ve been actually saying this on the tape on fast money on market call a little bit, I’m actually thinking that there’s maybe a really decent chance that we do have a soft ish landing. What does that mean? That means that we have a mild recession were due for one, and that maybe unemployment doesn’t get well above five, 6% or so. 6% would be a very hard landing. But here we are at 3.7%. We’re just up a little bit from the three and a half percent, which was the pre-pandemic low that we printed a couple of months ago here. And so maybe the markets have one more test Danny of that October low, anticipating a mild recession, and maybe we kind of make it out of this without an all out disaster. [00:04:40][46.6]
Danny Moses: [00:04:40] So aside from there being a technical recession, which technically we already had two quarters ago, first quarter, second quarter, negative GDP. So whatever you want to call it. But here’s where I would be concerned. If I was bullish if I was bullish, would be that once the dust settles between, okay, the Fed went 50, it looks like they’re only going to go 25 the next meeting. Okay, then when the dust settles, what are you left with? You’re left with the lag effect of over 450 500 basis points of rate hikes that have occurred here in a period of nine months. And you can have this period between February, March, April, May, where the Fed’s not going to cut. And if, by the way, if the Fed were to cut, something went very, very wrong. So the markets obviously would trade a lot lower from there. But I think you’re going to enter this kind of peer like, okay, so I think it’s an almost an a sell on the news event that might occur. And I say that because we’re going to talk about some of these earnings which have been coming in here. Things are slowing. I mean, the savings rate literally for the consumer is about as low as you can go. Credit card balances are about as high as you can go. So I just believe that it’s all about the consumer. And as we roll the calendar after the holiday season and so forth, I think we’re going to get sober not just from drinking a lot of eggnog and vodka and tequila, but I think when the reality sets in and what we’re looking for going into Q1 and S&P earnings as they start to come in for these companies and what that looks like in Q4 and then for the rest of 23 so I’m not so sure. [00:05:55][74.9]
Dan Nathan: [00:05:56] Here we are. The S&P 500 is down 14 and a half percent on the year. It was down 25% at its lows. The Nasdaq is down 26%. We know that the average stock is down a lot more than that in most of the major indices here. And so I guess the point that I would make is that at some point, let’s just say that this 15, 16% rally in the S&P 500 over the last call it month and a half or so. Let’s just say that has got a lot of investors off sides for what’s going to come next. And so what’s going to come next, as to your point, is that all of the tightening that we’ve seen in such a short period of time, it’s really important to remember that the Fed started raising interest rates in March. It was the first increase since 2018. So you’ve been saying this and then if you overlay quantitative tightening, all of that tightness is going to hit the economy. So maybe that’s what happens in 2023. But at some point, the S&P 500 is going to go back and retest those mid-October lows. And that might be it, though, Danny, if it’s kind of discounting at that point, a narrow recession, economic, let’s call it malaise for 2023, the stock market will bottom before we know that we’re in a recession. Is that fair? [00:07:09][73.3]
Danny Moses: [00:07:10] Very fair. I think before we know that we were either in it or we’re about to go into it, I think the market will bottom. I don’t know where that is Dan, I still believe we retest the lows this time of year. Right. I’ve mentioned before a couple podcasts ago that we’ve had some rough end of year Decembers in the last I’d say in ten, we’ve had two or three really rough ones. That’s not normal. Once you get past December 14th or 15th, you kind of want to glide into the end of the year whether you’re bearish or bullish. And to be honest with you, I think both camps here, which is right to close the year right now, it’s been a stressful, volatile year and just kind of want to turn the calendar here. So to your point, Dan, Bears do not want to see this market keep rallying, be forced to change the position. In the same point, people that are under-invested, not necessarily bearish, don’t want to feel like did they have to chase higher? And that’s kind of where we are. So there’ll be a lot, I think, of volatility going into that December 14th Fed meeting and then we’ll see. But let’s just look today, one thing is for certain inflation for the most part has peaked. The question is how quickly is it going to come down? And soon the argument will be for like job number that’s going to come out tomorrow. We don’t have that number yet, but it’s 200,000 and it’s 2.7% on the unemployment. How is the market going to react? I couldn’t tell you how the market would react. Like we said last month, if you told me it was 350 or 125, I couldn’t tell you what the market was going to do because does that feed into this Fed narrative or not? So it’s going to be really interesting. But then I think it’s really important where a lot of the stuff we get from the Fed on inflation and consumer spending is always, you know, six weeks delayed in the past. We’re getting real time information from earnings from companies right now. Retail and they are describing, I think, accurately exactly what’s been going on. This started with Walmart and Target several weeks ago. They gave us a look, a real time look into how the consumer is doing. And so I think that’s what we should be focused on is, again, what companies can you own? How are some of these companies navigating their way through all of this? Because they don’t have the ability to send their portfolio to zero net cash. They don’t have the ability to go long or short. So I think that’s worth discussing. [00:09:02][111.7]
Dan Nathan: [00:09:03] No doubt about it. It’s interesting when we talk about the move in the S&P 500, it feels like deja vu all over again. I think we were kind of saying some very similar things in December of 2021. And I think you and I and Guy were all in agreement that that rally was a bit of a fugazi. You the Nasdaq had topped out, but we had already seen literally massive pockets within the Nasdaq had already been corrected. And so the S&P made a new all time high the first week of this year, which is pretty astounding. But let’s just take a step back here because again, until S&P earnings estimates for 2023 come down meaningfully, we cannot bottom into that economic environment that you just kind of laid out. So let’s just look at this report. It’s out today. It’s John Butters from FactSet. He’s the senior earnings insight analyst. And we talked about this yesterday, Liz Young and I on market call a little bit, but today’s note is really important. The bottoms up EPS estimate for the S&P 500 for next year is $232. You makes the point that over the last 25 years, analysts have overestimated the actual EPS number by 7% on average, one year in advance. Danny if you want to take the S&P multiple where it was trading at the lows in October, let’s say it was about 15, and you want to multiply that times that to 32 number, you get about 3500. Where is the S&P right now? It’s 4070. If you want to take the 7% off of that 232 number that gets you to 216, you multiply that by a 12 multiple is your 3250. Where did we bottom out? Just in October it was what, 3490 or something like that. So I guess the point is, until we start to see that calendar 2023 number come down, I don’t think the S&P can bottom. And then if you put it together with we get into the new year, we start going lower, we have some negative preannouncements. We have analysts start taking the company guidance down. That’s when the strategists will start bringing their 2023 estimates down. And then when you have the height of bearishness, we have yields lower because we have a weaker economy, at least on the ten year. That’s how the market is going to try to bottom, in my opinion. [00:11:12][129.0]
Danny Moses: [00:11:12] Yeah, I totally agree. And listen, even within all of this, S&P, we get obviously we talk about that as the main market. That’s what we use to kind of gauge the markets. But, there are a lot of stocks that are up this year. Right. A lot of things that have been working. And I’ll say it again, whether it’s in energy or certain retailers, CPG companies that are kind of out there. And I think that’s the thing. It presents the opportunities. When the S&P drops down, you get a chance to buy quality. When the S&P has a rip up, sell the crap. We continue to see that occurring. And I will tell you that you’re right. I mean, rates to me, obviously, we all believed, at least all of us on this show believe that the ten year yields had gotten way ahead of themselves in terms of too high. They’ve now pulled in and it’s becoming apparent what the roadmap that you just described is telling us where 70 basis points plus inverted on the two year and ten year at this point. We know that the terminal Fed funds rate moves between, call it, 4.9 and 5.15. We’re tracking more towards the 54.9 after the Powell interview yesterday. But we’re kind of there the two years trying to reflect that out a little bit. So it’s obviously trades at a discount to that at 4.2, five or three wherever it is. But it’s telling us a slowdown is coming. And to your point then, there is no way this market is pricing in any type of that. And I’ll tell you this, we talked a few weeks ago about this kind of hung debt that’s out there and Wall Street between all these LBOs that have occurred, believe me, with rates coming in like they have and credit spreads easing a little bit here over the last few weeks, overall, they are throwing out as much as they can. But let’s not kid ourselves. There are tens of billions of dollars still sitting inventory that needs to come out. So I just think it’s an elephant through a mouse hole in the sense of the liquidity, at least as it relates to the debt markets for the most part. And again, that’s where the bottleneck and that’s where a lot of the problems have occurred in the tightening of financial conditions kind of out there. And I think it can alleviate for a period of time, but I think it’s going to remain so. [00:12:50][97.5]
Dan Nathan: [00:12:50] Did you just make up a new metaphor? I’ve never heard that. An elephant through a mouse hole. Is that a thing? [00:12:54][4.2]
Danny Moses: [00:12:55] Well, yeah, I think so. I mean, yeah. An elephant through a mouse hole. [00:12:57][2.3]
Dan Nathan: [00:12:58] I’ve never heard it. It’s nice. Maybe maybe we’ll start to use that. All right, let’s think about this, because I think a big determinant for how I guess our economy can find a bottom after all of this tightening is really when China reopens, which has obviously been very easy because their economy has literally been in this weird stasis for three years. Danny, think about this. They started locking down Wuhan in December of 2019, January of 2020. We’re at December 2022. It’s really remarkable to think about. And so we’ve seen some volatility clearly in Chinese equities of late as people are anticipating some sort of move by President Xi. I just don’t think it’s going to happen. But I saw a report out this morning where Bloomberg economists were expecting a full reopening by mid-year next year. Well, what if that were to coincide with a recession here in the US, in Europe? Might they kind of balance each other out and might it not have the impact on a global basis that one might expect when an economy like China comes back on? Because I think crude oil at 80 bucks is kind of telling us that a gangbusters roaring twenties sort of economy, global economy is not happening in 2023. [00:14:14][76.6]
Danny Moses: [00:14:15] Well, it’s interesting. One other point, just on the Fed and the impact that it has, we’ve talked about it. So the flip side people believe in, the Fed has done, as you saw, all risk assets take off yesterday, including energy. And that can actually work against you, obviously, because if energy prices rise that we’ve talked about, that may occur. So that in itself becomes self-fulfilling, that it’s inflationary in time anyway on that. So when you talk about China, it’s been three years and it made me think of truck in what a long, strange trip it’s been. Grateful Dead feels like that. But you’re right, it’s kind of open. It’s kind of not like you’ll know that things are kind of picking back up. And then gradually. It is interesting, though, that the protests in the street and people that are very upset, maybe it finally did something, maybe it scared Xi enough to say, all right, you know what, we are being a little bit ridiculous. Let’s back off of this a little bit. And you saw what can happen. I mean, you guys have been saying, I believe, on some market call and other things to buy, potentially Chinese equities. Certain Chinese equities had been beaten down. And you can see how much they’re up Dan. I mean, they’re from the lows. I think some of these names I think are up a lot. So from an investment perspective, there’s opportunities. What it means globally to your point, which I think is a good one, what happens if we’re in recession and China’s still really not taking that does not look good globally at all. [00:15:23][67.8]
Dan Nathan: [00:15:23] How did you not seeing that Danny Dallas got the soft machine Houston to close to New Orleans. New York got the Ways and Means. All right. Here’s a question for you, a little trivia. What is the soft machine that Dallas has got? Do you know what that is? [00:15:36][12.6]
Danny Moses: [00:15:36] I have no idea. [00:15:37][0.5]
Dan Nathan: [00:15:37] You know what it is? It’s a margarita machine. Is that pretty cool? [00:15:40][2.7]
Danny Moses: [00:15:40] That is pretty cool. A little trivia there. [00:15:42][1.3]
Dan Nathan: [00:15:42] All right Danny you made a really good point about what the retailers here in the US are telling us. That’s the real time data. It’s not a lot of that lagging data that the Fed, of course, they speak to it. I don’t think they rely on it so much, but we all obsess over those data points every day. But it is amazing when you get a retail company, let’s say Costco. Right. So they had disappointing same store sales stocks down six and a half percent today as we’re taping this here. Year over year I think their same store sales for November were like five and a half percent and last year they were like 7.7%. And they’re talking about all the sort of inflationary pressures as it relates to them running their business, but also that their consumers are facing. When you see that real time data, they’re telling you this is it a one quarter thing, Danny? Is it something that’s going to last into 2023? How do you extrapolate that piece of data as it relates to Costco, because also Dollar General and this is one that guy has talked about a lot. Both of these companies are probably seen a bit of a trade down by a higher end consumer as that savings rate is going lower. So I’m just curious, what are those two reports telling you? [00:16:47][64.3]
Danny Moses: [00:16:47] Yeah. So it’s really interesting. And this is what makes markets so Costco so the sales for November came in at 5.7%. That follows 7.7% in October of this year and 10.7% in September. Right. So deceleration. Part of the reason that’s happening is because if you’re a Costco member, one of the reasons you are is you get to go and fill up your car because you get discounted gas as a Costco member. So one of the arguments it’s kind of counterintuitive has been if gas drops like it has, I think gas prices have dropped roughly, let’s call it 30% from the highs. You don’t need to go to Costco to fill your car up because you don’t need to save that much money. But the flip side of that would be if people are paying less to fill up their car, they should have more disposable income outside. So one of the reasons people think or that they explained away Costco is that they’re not going to the store to fill up with the car, therefore they’re not going in to spend money. So that was one of the things that was happening. Target had already told us the consumer was kind of looking for value shifting around. Costco kind of alluded to the same thing. As it relates to Dollar General they had an issue, I guess they have a shortage of warehouse space, so they have supply chain issues and their sales mix. They said it again, more to food. I mean, look what Walmart told us and why Walmart stock is outperforming all these names. They are the economy. To your point, Dan, people that have dropped down to kind of come to Walmart from Target or wherever they else they might would have gone. But food is cheap at Walmart and that’s where people go to get their essentials right. The consumables, so to speak. So each of us are telling us different thing, obviously, but earnings are going to rise 8% instead of 14% for Dollar General. So obviously cut their outlook and the sales mix did not look good on the margin side either. So each have their own issues. Listen, both companies will always be around. It’s fine, but they’re giving us kind of a look into what’s going on. [00:18:19][92.3]
Dan Nathan: [00:18:20] So this is what I just got to kind of bring up. And it’s a shout out to our friends, Vinny and Porter here, because I think they detailed this on the podcast a couple of times over the last year or so when Salesforce CRM was added to the Dow Jones Industrial Average and Exxon was taken out. What did they say? They shorted Salesforce and then bought Exxon, and it was a brilliant trade. Okay, so as we’re talking right now, Salesforce is down 14 boxsets nearly 10% or so is still above its 52 week lows, but it’s down 45% or so from a year ago. The CEO, the co-CEO, Bret Taylor, just stepped down abruptly. You know, he and Marc Benioff, who’s the founder of this company, they had this nice little bromance, I think a lot for years. People have kind of been anticipating Benioff taking a back seat at some point, but they made Bret Taylor a co-CEO here. Him leaving is kind of interesting. I’d add one other thing, Danny. Bret Taylor was on Twitter board under Jack Dorsey, and I wonder if there’s something going on there. Maybe as Elon has just turned this whole thing upside down, he’s probably realizing he could use a real CEO to run that company, go back to do some of the other mayhem that he does in other places. Thoughts on, I guess, on Salesforce. Because the most important point is that they are seeing a slowdown in enterprise demand, which makes sense if you sell seats to software and tech companies all over the place are cutting 10,000 here at 13,000 there, you’re going to have less demand for those software licenses. So just kind of string that all together here because I think that’s an important point. [00:19:54][94.4]
Danny Moses: [00:19:55] All right. I’m going to throw a mini ROTT in all of this and then I’ll cover everything you just discussed and a little bit more. So about a month ago, I started to talk about why do people follow the Dow Jones and not the S&P 500? I mean, everyone follows both. But some people watch the Dow and they’re like, oh, that’s the market for the day. Let me just review again for people the Dow has 30 companies in it. Do you know that? They set it by two reps from The Wall Street Journal and two representatives from S&P Global? That’s how they determine who goes in. It has to be US based company. There’s other qualifications, can’t be utility, can’t be transportation, to your point Dan it was in August of 2000. ExxonMobil was swapped out of the Dow for Salesforce. Salesforce went from roughly $200 to $270 on that move, and Exxon went to sub 40. Exxon is now 111. So Salesforce is down to 144. Right. So let’s go through exactly. Let me focus on the Bret Taylor, who was co-CEO who’s stepping down. He was chairman of Twitter, but he did lead the $27.7 billion acquisition, obviously, of Slack. But one of the thing happened, Dan, that kind of it wasn’t a Friday night. Dirty was a Tuesday or Wednesday night dirty. But the head of strategy, this guy, Gavin Patterson, stepped down on November 23rd, by the way, the same time. That was interesting. Effective January 31st. And that kind of went by the wayside. Maybe people did. But Dan, those two people together leaving and to your point, billings have dropped. I mean, they missed the expectations for billings by 8%. That is the current business that brings you recurring revenue in the future. So. Stock deserves to be down. My question now is not that I’m calling. He’s going to get kicked out of the Dow, but it’s kind of an embarrassment, right? I mean, what an embarrassment. Not that anyone’s held to that or whatever. The point is that look how the Dow is underperforming the S&P today. When you look at these things, you asked this question, not a big deal to investors that understand what they’re doing, but again, to people that watch the markets start to look at those type of things. So, listen, it was a great call by Vinny and Porter, obviously, at that moment by one of the greatest pair trades of all time, taking advantage of both technical. But again, fundamentals. To your point, Dan, back to what it means for Salesforce is cloud spending is slowing. And listen, Salesforce grew, as we know, was a roll up. And we know Benioff has a very, I would say, great personality. Right. But he’s a boisterous guy. And now two co-CEOs in the last four years have tried to work with them and they can’t. So read into what you will. But I also wanted to point out the hypocrisy of the Dow Jones vs the S&P. [00:22:08][133.2]
Dan Nathan: [00:22:09] Well, you made the point about the Dow. I mean, it’s just a dumb index. 30 stocks, price weighted. The largest weighting is UNH it’s got 10% of the weight of that index and it’s got a $500 billion market cap where Apple has a $2.4 trillion market cap. It makes up less than 3% of the index. So, again, some old time investors like to quote it. I think a lot of people don’t sit there and stare their FactSet machines all day, every day watching the market. They pick up the newspaper and they see the Dow quoted and that’s why they do it. But again, you won’t hear us quote it. [00:22:40][31.4]
Danny Moses: [00:22:42] Exactly. By the way, one other name, this Land’s End. I mean, it’s not a huge company. It’s a 400 million market cap or whatever, but stock’s down 30% today and that’s on transportation costs and inventories. They’re building all their inventories ahead of the holiday season. Right. And people like good luck with that. But again, some of these companies can manage their businesses better than others. And that’s what I’m talking it’s not all of retail, but again, exposes things like Land’s End. So that stock’s getting walloped today, too so. [00:23:07][24.8]
Dan Nathan: [00:23:07] Switching gears here a little bit, there was a pretty fascinating interview. Our show Fast Money got preempted Danny by Andrew Ross Sorkin of CNBC interviewing SBF Sam Bankman-Fried, former CEO, founder of FTX at his DealBook conference. It was pretty fascinating interview. Was not in person. No one knows where he was. Maybe he’s in the Bahamas. He wouldn’t really say. Pretty awkward interview. He looks like he feels really bad about what is apparently or allegedly a massive fraud that could be the tune of $10 billion. And again, FTX was one of the largest crypto exchanges and it seems to be that he created a mechanism where he could take out client funds, move it to Alameda, trading a firm that he 100% owns and then was even from there siphoning money out of that. It’s interesting. This might be the worst take I’ve ever heard from somebody who is meant to be a very reputable investor. Bill Ackman of Pershing Square. He tweets out at 5:47. This is while the interview is going on. Call me crazy, but I think at SBF is telling the truth. And then not long after SBF tweets back at him, I deeply appreciate this. I’m going to keep fighting as best as I can for users. Danny, what the hell is going on right now? [00:24:27][80.6]
Danny Moses: [00:24:28] Was it a couple of weeks ago that his lawyers all dropped representation like we can’t be? Okay, I’m watching that. I feel like I was watching a trial. Andrew did a great job on the interview and I couldn’t believe that he would answer every question. I’m sitting there, Oh my God, this. And I think he was trying to be transparent in his own way, and it was horrifying. And if I had been an investor, I just want this thing to go away. If your money’s gone, it’s gone. I don’t need to be shown again. And I wasn’t an investor in FTX, but to be show again that I invested in, this guy watching this guy speak, I mean, it’s insanity that he was like that four or five years ago. So I will tell you this, he’s age like Benjamin Button, the pictures of him from three or four years ago when he was splashed around. Now, I mean, he literally looks like he’s 80 years old from 25. It was actually upsetting, especially when Andrew read an e mails that he got from people that he wanted to ask questions like I lost my life savings. It was $2 million. Can you how could you do that to me? Can you tell me where it is? He couldn’t even answer where it was or the whole Alameda thing. Not taking responsibility for the co-mingling of funds. It’s just it was totally crazy. And I don’t think he’s in the Bahamas. I’ve got a funny story for you. I was in the Bahamas for a couple of days last week. And when I got to Nassau, which is where Albany is, by the way, it’s right there of the airport. I did not go to Albany, where he owns 13 homes and so forth, but I started thinking about I’m like, maybe I’ll spot him, maybe whatever. So I go to the casino, I leave and I want a little bit of money and I go into the airport. I’ve been to the Bahamas, honestly, a hundred times, maybe, maybe even more. And I come through customs and you know that there’s a customs agent that wants to be the hero that wants to literally find an FTX or maybe not that SBF would go through that. But after the interview he gave yesterday, it wouldn’t surprise me if SPF took a JetBlue flight from Nassau to LaGuardia. But anyway, they took me in a back room, started asking me questions, and they didn’t ask me about was I in crypto? They took apart my bag. How much money did you win in the casino? Whatever. They asked me these weird questions and I thought at that moment I’m like they’re on guard again, just kind of a side of that. But this is crazy. If he comes back to the U.S., obviously should be arrested. I don’t know what’s going to happen, but it was upsetting, it was entertaining, it was revealing. And again, like I said, if I had invested in this guy, I would be embarrassed, in fact, that I actually followed this guy into the fire so. [00:26:35][127.7]
Dan Nathan: [00:26:36] It’s interesting, though, that that interview was on CNBC. Obviously, most people watch CNBC for the stock and the bond market and most CNBC investors probably are not exposed to that. They’re not invested. The VC firms that invested in FTX, they’re not investors in Alameda. They probably didn’t have institutional accounts after that, just got ravaged. And again, I don’t think they’re probably that active crypto traders either. So it just fascinates permeating a little bit into the kind of broader sentiment about the markets. And you’ve been talking about Tether on this podcast for over a year and you’ve asked a lot of we had a lot of crypto guests and I think we could all say that you, Guy and myself have been crypto skeptics. Now, granted, Guy and I’ve had lots of conversations with Michael Saylor. I mean, I think what we try to do on this podcast is kind of get behind the sentiment of some of these frenzies that we’re seeing and talk to people and hear their point of view. It doesn’t mean we’re backing them one way or another, but it is interesting that it’s just such a big story in the financial media. And I’m just curious because you’ve been asking every crypto person you come across about tether, we’ve seen Stablecoins go bust. A lot of the collateral for these Stablecoin are at the heart of some of the issues about the insolvency of some of these platforms. Talk to me a little bit about why this has been important to you for over a year, probably a year and a half or so. And how is it playing out? [00:28:03][86.9]
Danny Moses: [00:28:04] So the one last thing I’ll say on SBF and you just pointed out, people don’t even know what they’re watching. If they didn’t know a crypto was but they do know is they take away and saying how could you give money to this guy to invest? That would be my take away. This whole tether stablecoin thing is very similar. Think about who their head of compliance is, who runs the company. They’re backgrounds of these people. Very, very similar. The attestation of what they have in reserves. What’s their collateral? It’s all been a joke. New York State obviously banned them from doing business here because they called them out. They paid their fines, they did all this stuff. So my question has always been what is backing the 70 to $80 billion token that’s out there? So the answer is we’re finding out today from a Wall Street Journal article they have been actually lending their coins out to customers rather than selling them for hard currency upfront. They’re now admitting it’s going to be I guarantee it’s much more than this. It’s 6.1 billion as of September 30th. You don’t even know if that’s right. But the fact that this slowly ramping that up, I think from like 4 billion a couple of months before that to six, you know, it’s obviously much higher. But what is backing this coin here? What is the collateral? So what impact will that have overall? When I ask Bitcoin enthusiasts this, a year ago they said, oh, if tether went away or something was wrong, it would actually be a positive. I said, Why you guys? If people would actually go out and then buy bitcoin to replace it, it’s to be if their tokens were bad or I didn’t even understand that mindset is like, Oh, they’re going to go out and kind of replaces this, no question. And the by the way, there are much smarter people than me that have done a lot more work better. Tomlin being one of them on Twitter, who I follow and he’s been on this thing from the very beginning. This thing has gone honestly usdc for people out there that want to look at is gone. So I call into question their management, their board, their auditor, all it’s, it’s all bullshit. And I want to say one other thing about Blockfi, which kind of got thrown in here and filed bankruptcy in the middle of all this after two interesting things I want to point out. So obviously they put their list of creditors which are out there. So FTX is owed $275 million. But in court of trust is owed 729 million, which is an offiliate of blockfi. But I want to give Gary Gensler credit, which I rarely do, but go back to February 2022. He fined Blockfi for selling his unregistered what he called securities right. These products and they actually enforce a settlement. One of the creditors is the SCC and it was a $50 million fine to the SEC, of which they obviously paid 20 because it’s a $30 million claim and it was a $50 million settlement that Blockfi was supposed to pay all the states as a settlement to not do business. This could have been much worse. So I give Gensler credit. He was always on kind of these lending products as a related crypto. So I just want to give Gensler a little shout out there, which I rarely do. So I wanted to mention that. But listen, I don’t know what impact in. I’m not the right person to ask if tether proves to be a fraud. Now what does it hurt? Crypto? Because I’ll be honest with you, crypto is held up through all of this better on a relative basis than I thought it was going to. If you told me that FTX was a full scam and gone, I’m like, Bitcoin is under 10,000. I mean, I don’t have a I’m just saying I love to get your thoughts. [00:30:52][168.1]
Dan Nathan: [00:30:52] Well, it’s funny, you know, like so this morning, Andrew Ross Sorkin on Squawk Box had Mike Novogratz. So Mike never got this kind of themed macro trader. He started Galaxy Digital. He’s been a guest on the pod and he started basically a crypto merchant bank. And so he’s been a big proponent of lots of things crypto. Remember before Luna blew up, you had a huge tattoo put on his arm about that. So he was on this morning reacting to Andrew about the interview. You know, he said the guy what Terry Duffy said to us on the podcast a couple of weeks ago. But Terry did it prior to the blow up. He said he’s a fraud and this was he deserves to be prosecuted, is going to spend time in jail. And I guess wrapping the whole story up, though, what’s important about it is that it really does shake the confidence of markets. And this is what Novogratz said. And if you don’t have confidence in markets and you don’t have confidence in regulation, then it’s going to weaken everything. And I guess that’s a really good way to put it. And right now, a guy like Novogratz is right in the middle of this whole thing because I’m sure he’s got exposure from a VC basis or just balances at different exchanges or lending protocols or all the investment that he has made personally in the space. And he seems fairly well convicted even now. I think one of the comments he made is that is that is this feels right now it presents opportunity and that is the story of crypto. It’s kind of got nine lives here. And he’s saying Danny if you think about it, because the Phoenix does rise, we don’t see the laser eyes anymore on the Twitter, we don’t see the NFT PFP the profile pics on Twitter anymore. But it seems like some of the people that have raised a lot of money, it has staked their careers on it. And these are reputable people. They’re probably heads down, still building, still investing. And again, I think crypto will live to see another day. [00:32:46][113.9]
Danny Moses: [00:32:47] Yeah. Listen, when I saw this monologue, I thought it was a coin, not a volcano. In a way, I’ll be dead as I saw this thing pass or something. Oh, there goes another coin that imploded. Honestly, that’s where we’ve gotten to this point. But to your point, I think a lot of this stuff in crypto and again, I’m not the right person to talk to about it. There’s obviously tons of smart people that have been involved in the blockchain and applications for ethereum and all that. It’s a dot.com ask in the sense of it’s here to stay, right? The question is they need to get applications in place to start proving this thing out. And I think that’s going to be this next push your call it. I know you guys did 1.0, 2.0 or 3.0. All this bullshit, whatever it is, you better get to 10.0 rather quickly here and show some applications and usage because I think now, now you’ve got to prove that there’s a real use case. And the more this shit happens and it’s going to be tougher because the regulatory stuff is going to come in and it’s going to come in hard. And crypto was built upon the belief of no regulatory oversight, and now they crave it and they need it because they want to prove this thing out to be legitimate. [00:33:40][52.7]
Dan Nathan: [00:33:40] They certainly do crave it here. Right. What we’re craving, what our listeners, Danny are craving, are some great picks for this week in the NFL. You are 17 and 14. I don’t know if you listened last week when you were in the Bahamas, Guy and I had a podcast and you had texted him your picks and he read them out. But when he read them out, he did this amazing Danny Moses imitation of you. I mean, he absolutely nailed it. So let’s get the real deal this week, 17-14. You would say, as Guy said last week in your voice, you still make money. You still make money at 17-14. So how are we going to do this into the end of the year? How are we going to get this thing going? [00:34:17][36.8]
Danny Moses: [00:34:17] All right. I’m going to do an intro as guy to me, give you the NFL picks here. All right. What are we in here? What is this week? Week 13 in the lead in pay for play. Danny, you are a pedestrian. The pedestrian 17 of 14. Last week I gave you a record incorrectly, but that’s what you are. And I’ll tell viewers that you would only given one pick out last week. I made you give me a second one to to kind of give out there and you lost that one on Thanksgiving Day. But anyway, I digress. So, Danny, what do we have this week in the NFL? Oh, thanks, Guy. Appreciate that. You’re filling in for me last week. So a couple of games out there. So Tennessee finally didn’t cover. I think they had covered eight weeks in a row. They lost to Cincinnati at home. The Eagles have been winning. I love the team, but they’re not really covering. They’re not on a steady basis. They don’t look that great. I’m taking Tennessee plus five in Philadelphia. I think it’s a good bet here. I think they do backdoor cover they’re and my second pick of the week is 49ers. I guess they came through for me obviously last week. They’re giving four at home to the Dolphins and I just feel like dolphins going out west, they really haven’t beaten anybody and the dolphins have beaten just shitty teams over the last kind of 4 to 5 weeks. Let’s see how Tua does against this defense in San Francisco. Like I said, I think it’s interesting. So right now as we sit here, the niners are 6 to 1 to win the Super Bowl. I mean, I think three or four weeks ago they were 12 to 1. Right now it’s chiefs at 4 to 1, the bills at four and a half to one, Eagles at 6 to 1 and then the Niners. So kind of interesting how this is shaping up here. But those are my two picks, Dan, Niners minus four and Tennessee plus five. [00:35:49][91.6]
Dan Nathan: [00:35:50] All right. Listen, if you didn’t get your Guy Adami fix, stick around because Guy and Danny had a great conversation with Alfonso Peccatiello he’s the founder and CEO of the Macro Compass. [00:35:59][9.1]
Guy Adami: [00:36:03] CME Ad. [00:36:04][1.0]
Dan Nathan: [00:36:40] iConnections Ad. [00:36:41][0.8]
Guy Adami: [00:38:09] FactSet Ad. Alfonso Peccatiello is the founder and CEO of the Macro Compas, a disruptive investment strategy firm whose mission is to democratize professional macro analysis, tools and portfolio strategy. The macro campus leverages our experience running large pools of institutional money and offers financial education, unique macro economic insights and actionable investment strategy. Before launching the macro compass, Alfonso was the head of investments for a $20 billion portfolio for AMG Germany. Alfonso, welcome to On the Tape. Alfonso, it is great to have you along with Danny Moses. I will tell you that the three of us probably share very similar thoughts. I’m going to start this interview off the following way. And please, if you disagree with me in any way, please say, Guy, you’re an imbecile. I don’t know how the Italians say it, but I’ve said for a long time, the 21st century is going to be littered with many, many villains. But I think at the top of that list are going to be central bankers, not because they’re bad people, not because they have bad intentions, but because they’re extraordinarily misguided and they’ve created a problem that I’m hard pressed to believe. We’re going to get out of thoughts on that. [00:39:25][76.0]
Alfonso Peccatiello: [00:39:25] First of all, in Italy we say in bitchyla, which is sounds like in English, but it’s it’s just an Italian pronunciation. I thought it was fun to say thanks for having me here. It’s a pleasure. In 2021, the Federal Reserve was buying mortgage backed securities and treasuries because they had a certain view that inflation wasn’t becoming entrenched into the economy. It was all about the used cars and goods and reopenings, etc. They ended up being wrong, which is fine, but the thing is that they stayed wrong for quite a while and now I think especially Powell really feels the pressure of having to correct this wrong. And he’s going to be wrong again, guys, because this is going to end up overdoing it. [00:40:07][41.3]
Danny Moses: [00:40:08] That’s fair. So you were on market call on September 20th with Dan Nathan and myself, and at that time, I just went back and look, I think the S&P has a move much it’s up about 3% since then, the ten years up 15 basis points. But the two year since then is up 55, 56 basis points, certainly. Well, first of all, it’s an inverted yield curve, but indicating that potentially bad things are ahead, such as a recession. And I know that you feel that way. Any current thoughts or any updated thoughts from when we last had you on that kind of track? [00:40:36][28.3]
Alfonso Peccatiello: [00:40:37] Yeah. So we are progressing towards we could grow at a very fast pace and inflation is also going to slow down. So we’re looking at a nominal growth slowdown into 2023. So very similar situation to 2001 if you ask me. I can see really a lot of similarities between 2023 and 2001. And when I see those, I always refer back to what actually happened before 2001. So that was 2000 a year where the dot com bubble actually burst. The Federal Reserve raised interest rates of six and a half percent in 2000. And, you know, you add the inflated stocks dropping 80%. Does it remind you of 2002 where Spark lost 90%, where overinflated stuff went down 70%, where the Federal Reserve is raising interest rates not to six and a half percent, but they will be raising it to four and a half, 5%, which in the 2020s is actually quite a rate if you account for demographics and worker productivity and all of that. So it really resembles 2022. It resembles 2000, which means 2023 might resemble 2001. And so I ask myself what happened in 2001 and in 2001, the Federal Reserve tightening of 2000, that that impacted the market actually played out in the economy. So you had earnings coming down, you had the labor market weakening, you had a proper recession. That’s what was 2001. And the Federal Reserve did pivot in 2001. They cut the interest rate by 500 basis point in 15 months. That’s a pivot. And then I hear people saying, yeah, that must mean that the S&P went through the roof. It didn’t. The S&P only bottomed in 2002. So that’s 15 months since the beginning of the pivot. And 2023, in my opinion, is going to resemble very closely 2001. [00:42:19][102.0]
Guy Adami: [00:42:20] Let’s talk about the stock market because since November of last year, so basically a year ago is when this Federal Reserve pivoted. And although the market did rally into December, people talk about seasonality, whatever it was since middle late December, obviously the markets face some significant headwinds. We’ve bounced along the way. We obviously saw a pretty meaningful bounce in the middle of June and August were at the I think at the lesser, the ending stages of this bounce we saw from October 14th into where we are trading now. But for me, the market’s sort of whistling past the graveyard here. You know, I don’t think we felt the pain that should be commensurate with what’s been going on with not only our central bank, but central banks around the world. Thoughts on that? [00:43:04][44.1]
Alfonso Peccatiello: [00:43:05] Well, I think you’re right. And let’s not forget that also in the bear market between 2000 and 2002, the Nasdaq rallied seven times more than 20%, more than 20%, seven times. So potentially you could have had headlines of this is a new bull market seven times during a bear market, which lasted two years. So bear market rallies are totally normal. They’re part of the process. And we are witnessing just one exactly like we did in July. Do you remember in July we got headlines that there was a new bull market? I mean, do you remember that there is no new bull market because the stock market tends to bottom over time in long bear markets when two conditions are met, a earnings have already declined and analysts have thrown in the towel, which means they have downgraded earnings aggressively. And today, earnings have barely started to decline. Analysts are still predicting earnings to grow next year by 5%. That’s not consistent with that process being already advanced. And the second is the fact the Reserve must have already pivoted for a while. So it must have already accommodative conditions for a minimum 6 to 9 months. The Fed is still raising rates, the Fed is still doing duty. So that means we are nowhere near a point that is fulfilling neither of these two conditions. Also, the other thing is you can do some simple mathematics on earnings per share and valuations to come up to a reasonable level where S&P should trade in this environment. And then you look at earnings per share and every forward looking indicator I’m using and my macro models are pointing to earnings per share by the end of 2023. In the $200 or below is an area. Now if you look at that, which would be an earnings degrading of roughly ten 15% in line with a recession, negative earnings growth in 2023. Then you look at the valuation attached to that. But valuations during a recession are not 24 X, they are not because the risk premium need to widen, because people are losing their jobs, because retail flows are negative as people get fired. Actually, if people need to withdraw their 401Ks and basically the flow becomes negative when it comes to retail and this year has been positive. So, you know, 200 earnings per share by the end of next year, times 15, 16 earnings, 32-3300 sounds like a reasonable place where equities should trade close to the bottom next year. We’re looking at 4000 right now. So there’s quite a doubt, in my opinion. [00:45:26][141.0]
Danny Moses: [00:45:27] Well, we certainly totally align on that. That’s exactly where I think we’re probably headed. And the one thing you’ve pointed out, which I agree with, is that people are rooting for a weak labor market, which is somewhat perverted. Because they want the Fed to stop. But we’ve gotten glimpses already. You know, like you said, in the late spring and summer of where this market can go, things can break. So we’ve seen crypto break. We’ve seen a lot of companies that are dependent upon the credit markets for securitization start to break. What is it that you’re looking for? What are the signs you’re going to see for things that continue to break here as we move forward? What should we be watching? [00:45:57][29.8]
Alfonso Peccatiello: [00:45:58] So I think the labor market is a very clear thing that could easily break. It’s been very resilient so far. The labor market tends to be a coincident, lagging indicator, so the economy weakens. You see it first in PMI, rise and fall in the indicators, then you actually see it in coincident indicators. The labor market comes a little bit later in the process, but it undoubtedly comes. And I think the other thing that will be complementary to the labor market breaking is the real estate market repricing pretty aggressively on the way down next year. There is this thing I mean, people are used to the Fed having their back to the Fed, put to house prices rising inevitably 10%, 15% a year. Next year, I think global house prices are going to drop by 15 to 20%. And if that sounds scary, it only sends us back to the beginning of 2021. Now, when such a leveraged asset class, don’t forget the real estate market is the biggest asset class in the world. It’s bigger than the equity market. It’s bigger than the bond market. It’s bigger than the equity and the bond market combined. It’s absolutely gigantic as an asset class. When that asset class, with prices down by 15, 20% in a year, you obviously have ripple effect, second round effects. You do have that. I think this is a place where to look, where people are used to see upsides, new businesses being born, house flipping, businesses being born, brokers popping up like mushrooms. All of those are going to be reversed next year. And I think here somewhere there might be some leveraged play in the real estate market that gets hit very hard. And this has a reverberation for the labor market, too, because the housing market is 15 to 18% of U.S. GDP, including ancillary activities, furniture shops, brokerage shops, etc., etc. It’s pretty large. So it’s something I’m looking very closely to. [00:47:47][108.8]
Danny Moses: [00:47:48] The one thing about all the investors in this market has been about immediate gratification and trading on every data point that comes through. Right? And so we know over time there’s always a lag effect from the Fed cutting or raising rates. Right. We’re just now entering kind of six, seven months since they kind of began this crusade in the 75 basis points four times in a row. And I totally agree with you that we’re going to start to see the impact. This economy in the U.S. is always dependent on the consumer spending. Right. And now we are seeing credit card balances reaching new highs. Right. Savings rates reaching new lows. I don’t know what it is that people aren’t paying attention to or they think they’re going to get relief. Because as we balloon these balances, both on the corporate and consumer levels, the paying, the price is coming. It’s here now, but it’s going to keep continuing. So I’m not sure what the one data point or what the one moment is going to be when people realize and listen. I think the three of us, while we’re were bearish, we try to be constructive. And I know that you’re the same way. You would love nothing more, I’m guessing, than to really be bullish here. But take us into the beginning of 2023, because, again, my belief is that if the Fed actually pivots or indicates they’re going to slow, something has happened. Like what is it that has happened that made the Fed slow? Is it inflation’s come down enough or is it it’s something broken. I go back to what are you watching specifically to indicate that we’re at a, quote, pivot. Now, let me just say one other thing about 2001 that I think is an anomaly, 9/11 tragic occurred. Remember, in September. Obviously, everyone knows that 2001 the Fed ended up cutting more, I think, than they wanted to. Right. Because they wanted to stimulate the economy, which ironically, I believe led to the housing bubble, then led to these mortgage innovation products in 2002 and three. So I just wanted to I know those are two unrelated questions, but I wanted to point that out, get your thoughts on that. And also, again, what we’re looking for, what is the data point? Is it slowdown in GDP? What exactly should we watch out for? [00:49:31][103.5]
Alfonso Peccatiello: [00:49:32] So I think historically the Federal Reserve has started doubting whether the stance was too tight when they’ve seen a lot of pain coming through the labor market because they are, of course, not the smartest in the room and they’re smart enough to understand that if the labor market is weakening and you’re having job losses, then ultimately consumer spending will slow down. People lose their job, their nominal spending power goes down. Their ability to demand higher wages and fulfill this inflation spiral with higher wages goes down because you’re getting fired. You’re good if you if you have a job, let alone asking for wage increases. So when the labor market normally weakens pretty materially and generally, that is when the pace of job growth slows below 100k month in nonfarm payrolls in the US because of the growth in the labor supply in the US. To keep unemployment rate stable, you need to add roughly 90k new jobs a month. If you start adding that or a bit less than that on a moving average basis, then it means unemployment rate going to go up and the Fed Reserve knows that they actually want that they want unemployment rate to go up. They want things to slow down but if it becomes too much, then they also understand. Don’t forget, they have a dual mandate. They have a full employment mandate and a price stability mandate. And so far it’s been all about price stability. But when unemployment gets bad, then they start to look at it again. [00:50:48][76.0]
Guy Adami: [00:50:48] Yeah, well, that’s bullshit because I mean, dual mandate is making sure the S&P and the Nasdaq go up, which they’ve been extraordinarily successful at for a very long time, until recently, number one. And in terms of price stability, I know you know this. So I’m preaching to the choir, as they say. But the last 18 months, the most volatile asset class on the planet have been U.S. bonds, Treasury bonds. I mean, think about some of the moves we’ve seen not only the course of months, but over the course of minutes. It’s mind boggling that they can actually speak to price stability and say they’ve basically check that box they’re all full of shit. But let me ask you this, because this is something you talk about and I find it fascinating. You know, Danny does as well. The correlation between copper, which is an industrial metal, which sort of mirrors global economies as opposed to gold, which is not an industrial matter, it’s a store of value, it’s its own asset class, a different type of whatever you want to call it. And the two moving in diametrically opposed ways, I don’t think augers particularly well for broader economy. Speak to that. [00:51:50][61.4]
Alfonso Peccatiello: [00:51:51] Great point. So I look at the copper to gold ratio as an indication of what the markets think of how the economy is doing. And it’s pretty simple. I mean, copper is the bellwether for industrial activity all over the world. It’s used in so many use cases in industries and across industries that the better the price action in copper generally, the better industrial production is doing. And if you look at gold, on the other hand, the gold is an alternative form of money, if you wish. It’s a store of value. It’s a non-interest bearing form of money that can’t be printed either. So generally tends to do well when people are looking for an alternative place to own wealth. That is not dollars generally. That doesn’t mean the economy’s doing particularly well, right? So if you look at the ratio between the two, it’s pretty informative. And the copper to gold ratio is actually coming down relatively aggressively. And that’s consistent in my model. Again, with earnings per share being negative on a year, on year next year, it’s basically telling us that the economy is slowing and a lot of people are discussing this. China reopening is the thing that is supposed to lift everything. Now, China as a relatively elderly population, China has a health system which is, if you look at better per capita, whatever the data we get over here, it’s not looking particularly strong as being able to protect its population. Also, vaccination rates are bad and the vaccine they’re using is not effective at all. So they’re looking at a pretty bad situation up there. And I don’t think these reopening rumors will be validated to a large extent. And even if they would, it’s only a temporary effect that China would have a global growth. The direction of global growth is pretty clear and it’s down. It’s going to be most likely, I would say, a global concerted recession across developed markets because we talk about the US, you can have a look at Europe, you can have a look at Canada, you can have a look at Sweden. Sweden had the worst retail sales spread in over 40 years right now. Why overleverage the economy through the housing market? The housing market is freezing. Mortgage rates are too high. People can’t afford to have that wealth effect rippling through the economy anymore. It’s a global, concerted recession in 2023. [00:53:49][118.5]
Danny Moses: [00:53:51] So on that, let’s shift over to Europe a little bit because again, since we last spoke in September, the yields in the U.K. have roundtrip from 3.15 to 4.45 and back, indicating some form of at least stabilization over there. Obviously, we had the changeover in Prime Minister, etc. A lot has happened there, but obviously we’re heading into the heart of the winter here. I know energy prices, while they may have stabilized, governments are trying to curb the ability for these to move much higher. There’s still going to be a major issue. So let’s talk about the European economy a little bit here and the impact that you think that has on your overall outlook. [00:54:21][30.2]
Alfonso Peccatiello: [00:54:22] Yeah, that’s a good question. So Europe basically went through some pretty grim period because its terms of trade were horrible. I mean, Europe is a net importer of energy, very dependent on Russia. And the business model over the last 20 years was great, was based on two very cheap sources of leverage. You got very cheap energy from Russia to use a lever up to produce a lot of manufacturing output that then was exported elsewhere. Basically this is Germany Mrs. Mobil for 20 years get the cheap energy. Roughly 30 billion equivalent of Russian natural gas were good enough for Germany to produce 2 trillion of manufacturing output. That’s a pretty decent leverage that you have there on this cheap energy. And then the other thing was very low interest rates. So we levered up our real estate market here in the Netherlands, 100% loan to value mortgages are totally common. So people just levered up right. Now you’re looking at exactly the opposite, looking at not cheap energy anymore. You’re looking at supply chains which are not particularly in time anymore. So outsourcing that part and having cheap labor also has its downside all of a sudden. And you’re looking at the European Central Bank forced to try and get some credibility out of the market by raising interest rates and fighting inflation at 10%. So all of a sudden you shutter the foundations of the model. And honestly, what I looking at that my forward looking indicators also doesn’t look good. I expect a pretty decent recession in Europe too next year. [00:55:41][78.7]
Guy Adami: [00:55:41] 16 months ago, Danny Moses started talking about stagflation and that proved to be prescient. But there are all kinds of different things. I missed economics in college that day, so I’m going to ask you a question. Stagflation, deflation, disinflation. Obviously they all have different meanings. What are we facing here in the United States? Because it’s clearly one of the three. [00:56:02][21.2]
Alfonso Peccatiello: [00:56:03] So right now in the US, actually for the entirety of 2022, you are looking at stagflation, pretty stagnant growth on a trending basis and inflation going up on a momentum basis. That’s exactly the definition of stagflation. That is over in 2023, not over for a soft landing as the Federal Reserve hopes. That’s bullshit. Can I say bullshit on this podcast? [00:56:24][20.9]
Guy Adami: [00:56:25] Absolutely you can. Absolutely. I said bullshit, man, but say it with some gusto. Bring your Italian out because I’m as exercised as you are. It is bullshit. Soft landing. They’re going to navigate this thing. What’s happened? It’s been so wrong. I mean, please continue. But I got some thoughts on that whole thing. Anyway, I’m see you got me exorcized here. [00:56:46][21.0]
Alfonso Peccatiello: [00:56:47] And I can sense you are all worked up by that. But yeah, it’s not going to be a soft landing. This has nothing to do with it. I mean, if you look at the pace of deterioration in all these forward looking indicators, if you look at the housing market freezing, I mean, housing sales are down 40% year on year in the US. I want to repeat it 40% year on year down in housing sales. So I’m sorry, all these people over employed in the real estate business and ancillary businesses, are they going to have a job in 2023? I seriously doubt about that. Not to talk about the broader economy. So that’s what you’re looking at. And let me say something else. Most people are telling me off, yes, it’s going to be a recession, but inflation is going to remain at 5%. I’m like, have you looked at the last 100 years in the US? Every time there was a recession in the US over the last 100 years and we entered the recession with inflation at five, six, eight, 10%, we ended the recession and six months later inflation was seven percentage points lower than when we entered the recession on average. So right now we are entering, let’s say a recession in Q1 next year in the US with inflation, it will be six, 7% something along these lines, right? When we enter a recession, historically speaking, that means that by mid of 2024, inflation is going to be between zero and 1%. And that has been such a bad recession that people are getting unemployed, growth has gone down. That’s basically a deflationary environment where you get the negative inflation impulse and the negative growth impulse. Guys, it’s a recession. That’s how it works. And I’m not sure why people are confusing cycles with trends because everybody says after the new trend of inflation is on average 4% over the next decade. Cool. That doesn’t mean that this recession, as bad as we’re going to get it in 2023, is not going to cyclically push it to zero or 1% as every recession did over the last 100 years. There is a difference between a cycle and a trend in macro. [00:58:35][107.8]
Guy Adami: [00:58:35] Well if we measured inflation properly in this country, it would mirror what we’ve heard from some of the different companies like Procter and Gamble and Kraft Heinz and General Mills. Coca Cola. Pepsi, where 16%. I’m doing air quotes, folks. Organic growth is basically them passing on inflation to their customers. So real inflation in this country probably peaked north of 17 18% is my guess. Number one. Number two, technology is the biggest deflationary force in the history of mankind. So the Fed’s been fighting this windmill that they can’t defeat. They look at the world incorrectly. I mean, on one hand, you have these huge deflationary forces. On the other hand, you have these huge inflationary forces. My point is they have inflation in all the wrong places, and they’re going to totally screwed the pooch in terms of the tools they use to combat it. Thoughts on that before demo gets in. [00:59:33][58.0]
Alfonso Peccatiello: [00:59:36] 101% agree. Actually, look that there was an index which I found very, very useful. It was the Inflation of Necessities Index. So in July or August, it looked at inflation in food, energy, gasoline especially. So we’re talking about necessities, stuff you need to buy in the first place. So that’s the inflation basket that the lower cohort of consumers in the U.S. will have to face. That number, I think, peaked over 20% year on year. So you have the right bunch there. That’s roughly the number that most people were feeling on their skin, on their own inflationary basket of necessities, stuff they need. The other thing is the change of trend in inflation going forward. Of course, if you’re going to onshore stuff in not going to offshore every production to Vietnam or China going forward because we experienced some problems with it during the pandemic and know components couldn’t reach the U.S. or Europe anymore. And if we are going to do these net zero green energy investments, to a large extent, yes, obviously those things are inflationary on the margin. I’m not sure why people think that an aging population with weaker productivity and technology keeping its toll on the economy when it comes to disinflationary forces is going to disappear all of a sudden in the next 20 years. I don’t think it’s going to go anywhere. To be honest, if anything, it’s going to intensify. So there are some on the margin, the new inflationary forces on top of it. But the overall trend I think is unchanged. Before I was speaking about cycles. So I still keep my main stance that these recession is going to be pretty bad in 2023 and it’s going to bring inflation down, as every recession did over the last 100 years, secretly speaking. And I’m not sure. Neither markets nor people are prepared for it. [01:01:16][100.3]
Danny Moses: [01:01:17] So you obviously send out a lot of information both on Twitter and then to your clients. We’re going to talk about that in a minute. But tell me the hate tweets that you get or where people are really opposed to your thought process? Because that’s always an indication to me where you’re probably right. And then secondly, what would you own here other than S&P puts you on gold? What are you looking at? You can actually tell people to put money in. [01:01:38][20.8]
Alfonso Peccatiello: [01:01:39] So the most common hate tweet I get is that my pizza;s looking good. That’s terrible. You can say this to me. It’s not allowed. [01:01:45][6.5]
Guy Adami: [01:01:46] That’s a frickin insult, man. That’s. I mean, you’ve got to defend Your Honor. [01:01:49][3.8]
Alfonso Peccatiello: [01:01:51] Just kidding. But the biggest pushback is that this is a new inflation regime, and inflation is going to remain at 5% even throughout the recession. So I think this is very much ingrained in people’s brain. It’s a recency bias. For ten years, with inflation at 2%, it could never go up. Now, it went up. It stayed there for a year and a half. Now it can never come down anymore. That’s the biggest pushback I always get when it comes to owning stuff. I think those two five year yields at 4%, 5%. Guys, if we get a recession when the labor market actually cracks and inflation is coming down because the labor market is also cracking, the Federal Reserve will have no reason anymore to keep the Fed funds rate at 5%, especially if some damage happens to the real estate market. So these 2 to 5 year rates at 4% actually look pretty decent to me. [01:02:41][49.5]
Danny Moses: [01:02:42] So what does that mean for the dollar and then for gold? [01:02:43][1.9]
Alfonso Peccatiello: [01:02:44] Good question. Good question. On the dollar, I really like this question cause people are telling me, of course, if the Fed pivots, then the dollar depreciates while again. In 2001, the Fed cut rates by 500 basis points and the dollar ended the year up against most currencies. Why? Because it was a recession. A recession is a de-leveraging episode. People are going belly up. They reach out for the safety of the dollar. They want to actually make sure to get some hands on their dollar. So even if the Fed is cutting rates because the economy is bad, the dollar doesn’t necessarily depreciate in a straight line as people think. The dollar depreciate when the Fed is a commodity and the economy is strong, nobody needs dollars anymore. Dollars are going there organically. They don’t need to get their hands in the dollars. For gold yeah, that’s a very interesting point. I think is one of the offset that in the second half of next year could do very, very well because the feathers of this cutting rate is making basically real rates a bit more negative than they are today. The economy isn’t in a very good shape. People are looking for allocation in assets, and generally bonds and gold tend to do relatively well in that environment. Second half of next year, things are looking pretty good. [01:03:49][64.2]
Guy Adami: [01:03:49] So we’re 25 minutes into this thing and people listen and say, Guy, you’re an asshole, you’re a hater, you’re fed hater, you’re always negative, blah, blah. You asked Alfonso leading questions. You’re basically dogmatic, so, okay, I’ll play that reindeer game. What can go right? Like, what am I missing? Can these geniuses manufacture and basically orchestrate some sort of soft landing where there’s no pain and labor market inflation remains somewhat under control? The markets don’t collapse is not a credit collapse. What is the best case scenario in this and can it actually work out? [01:04:25][35.8]
Alfonso Peccatiello: [01:04:26] Yeah, of course everything is possible. Also me eating a pizza with pineapple on it is possible but is never. But it’s never going to happen. [01:04:32][6.4]
Guy Adami: [01:04:33] So don’t even. You know something? That’s it. I liked you 25 minutes into this. Now you’re talking pizza and pineapple. You’re out, man. That’s out. There’s no frickin way you’re eating pineapple on your pizza. [01:04:45][11.8]
Alfonso Peccatiello: [01:04:45] Absolutely not. [01:04:45][0.6]
Guy Adami: [01:04:46] If you’re doing that, turn in your Italian card right now. [01:04:48][2.5]
Alfonso Peccatiello: [01:04:49] There you go. And you’re right. So I agree, you know, everything is possible, but it’s never going to happen. So, I mean, it’s possible that we get the soft landing. Is it foreseeable that we get a soft landing? Yeah, but no, we’re not going to get it. So in order to get there, what you need is the following. You need inflation to magically slow down very fast towards 2 to 3%. So then the Federal Reserve can say, okay, that’s enough damage, we’re going to stop. We’re really convinced it’s there. We’re going to cut interest rates a little bit and then the labor market softly slows down and then everything is fine and perfect. Then we avoid a recession. It’s basically never happened in history. To summarize, if you look over the last 100 years, every time there has been such a tightening in financial conditions, such a vicious rise in borrowing rates across the board, a year later, a soft landing has never happened. There’s always a first time for for anything, but I wouldn’t bet particularly on that. [01:05:41][52.1]
Danny Moses: [01:05:42] So let’s talk about the macro compass, and I know that obviously you have a wide audience, large clientele, and it’s growing. Talk about your business, how you’ve expanded it and what it looks like. [01:05:50][8.8]
Alfonso Peccatiello: [01:05:52] So the Macro Compass started as a newsletter on Substack beginning of this year, and it grew to be something like 120,000 readers, which makes me very happy, and humbled at the same time. At some point I figured out that a newsletter is nice, but actually if you want to really bring investors through this learning journey necessary to understand macro 360 degrees newsletter, it’s not going to make it. So I actually moved it to a platform which is now the macro campus dot com where together with the written content, people will get to not only trade ideas and ETF portfolios, but also courses where I’m going to cover everything from monetary mechanics to our central bank works to our portfolio management works, risk management, everything from A to Z and interactive macro tools, which I’m very proud of. They’re basically a way for investors to get the same access to data that the pro people do because, you know, they basically have access to these very expensive subscriptions and they can get all of that. And I want to make sure people at a macro investor side all have the same access to information formatted in a certain way that will help them become better investor themselves. [01:06:56][64.8]
Guy Adami: [01:06:58] Alfonso, before we get that and thank you for your time, by the way. And you know, again, people call me a hater and say, if you could do it better, you should do it. And, you know, quite frankly, I’d love to be chairman of the Federal Reserve or a Fed official because I’d actually let capitalism work. But quick question, you here in the United States specifically, we fashion ourselves this great capitalist society, but effectively we capitalize gains and we socialize losses. And then we put it on the backs of these central bankers to figure it out on the back end. But politically, it’s extraordinarily difficult to run on a platform where we’re going to take our medicine. So I guess my point is this cycle’s never going to end. I mean, we are in this in perpetuity, I fear. Thoughts. [01:07:40][42.2]
Alfonso Peccatiello: [01:07:41] Uh, you’re right. I run a $20 billion book before starting the macro compass, which gave me the chance to speak to a lot of these policymakers, central bankers, and all of that. So the answer to this question that I posed to them is always the same. Look at my incentive scheme. What’s my incentive scheme? To do proper reforms with my incentive scheme to wipe out zombie companies? What’s my incentive scheme? I’m not going to get reelected if I do. So if I’m a central banker, I don’t get reelected that I’m going to basically leave people in misery. Because to wipe out generational wealth being built basically on this leveraging mechanism and what you’ve just described, so effectively sharing losses and having the gains for the few, it actually requires quite a lot of pain. And there is nobody who has, from a policymaker perspective, any good incentive scheme to actually correct that it’s not going to happen. [01:08:29][48.4]
Guy Adami: [01:08:30] You mentioned Misery, a great movie with the great James Caan, which I believe today is the 40 year anniversary of said movie. So that’s a good way to end it, Misery. Ladies and gentlemen, Alfonso, thank you for joining us here on the tape. It’s been an absolute pleasure, Alfonso. [01:08:47][17.3]
Danny Moses: [01:08:48] Thank you. [01:08:48][0.3]
Alfonso Peccatiello: [01:08:48] Pleasure’s all mine, guys. [01:08:49][1.2]
Guy Adami: [01:08:51] Thanks once again to CME Group and I 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. Dot com any time. Follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [01:09:14][23.5]
Dan Nathan: [01:09:15] 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. [01:09:15][0.0]
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