The Federal Reserve and Interest Rates

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If you're an executive, small business owner, project manager, journalist, or anyone responsible for important decisions, details matter. Conversations move fast and it's easy for key contacts, follow ups, and action items to slip through the cracks once the meeting ends. PlLOD is an AI powered not taking system built around dedicated recording hardware It captures conversations, transcribes them, and turns them into searchable transcript, summaries and action items So you can focus on the discussion instead of worrying about capturing every detail yourself Is applod. AI slash markets to learn more and use that markets code to get up to fifteen percent on Welcome to Profperty Markets. Scott is wrapping up his week in Can. So joining me today is our very good friend, the one, the only Robert Armstrong, US financial commentator for the Financial Times. Rob, thank you for joining me. It's been a while since we've had you on. Yeah, it and it's been wild times in Markets. so it's good where we're back and able to talk. My only question for you is how how do I get Scott's job? How do I get the job where you get sent to Can? You know what I mean? That's my question too. Not that I don't like hanging out with you, but like Starlet' and Necronies or whatever they drink in can. that sounds al right. I agree. Yeah. He's partoting it up at the Spotify party and the snap party after he made fun of Evan Spiegel on our previous podcast and somehow didn't get the invitation rescinded. But that's how it goes U yeah, he's parting it up with the influencers. Ne year you and I We'll make our own trip to Can. And we'll pay out of pocket and that's okay. I know we'll stay in a youth hostel. I can't wait. Well, very glad to have you on the show. and this is very timely because we are exactly at the halfway mark. This is our official halfftim report. So without further ado I'm going to launch us into our H one review A volatile first half of twenty twenty six is coming to a close. It's been a six month stretch defined by the AI boom war in the Middle East and an ongoing obsession with one big question, where are interest rates headed next? Still, markets have largely moved higher The S andP five hundred is up eight percent year to date. The MSCI World index minus the US, which tracks international stocks has gained thirteen percent, so it's actually above the US markets, but there are plenty of unanswered questions hanging over the market and the next six months could end up being even more consequential than the first. So we're going to tackle some of the biggest debates facing investors right now and see if we can come to any reasonable conclusions about where things might go from here So Rob, first off, I want to just quickly review what's happened in twenty twenty six so far what have been the big moments that either moved markets or surprisingly didn't. I think the first big moment that we saw was the invasion of Venezuela and the threatening of invading Greenland, which didn't end up happening But we had that and that was, I think, less consequential than people might have thought, but that sort of set the tone for the year. I can't really believe that it was this year, but it was We then saw an acceleration in the AI buildout. We saw a memory chip shortage, which we're seeing play out in real time, a massive surge in memory stocks. We saw SAasS apocalypse, which was triggered by a big U influx of new AI products from anthropic, which got everyone very scared about names like Adobe and Salesforce and Service Now and all of these sort of legacy software companies. We also started a war with Iran which led to significantly higher inflation We apparently came to a deal with Iran, but we'll see Space went public. We learned that Anthropic and open aI might go public. Those were sort of the big market events and SMP performance has been Pretty good although we've now hit something of a wall because for the past month or so, we're flat. But year to date, we're up around seven and a half percent. in the past month we've been stuck there. So Lots to unpack. O, let's just get your reflections on what we've seen so far. Well, first of all, I feel like I lived an entire lifetime just in your summary of the first six months of the year There's so much there. I mean, I'm just looking right now at the chart of the S and P five hundred And there's kind of, I would say, one, two, three, four, five phases So the year through March It's like Venezuela, AI worries or whatever The S and P, which had been rising vigorously is kind of flat So first three months a year, we're kind of going sideways All the noise you just referred to is maybe stopping the market from going higher But it's not falling March through April Yeah We don't know what it means It seemeems bad Energy crisis How is this going to resolve itself And then that's phase two is the scared section of the war April through May It's like Actually it's going to be fine. and I don't know how the market foresaw that it would be fine, but the market as of right now was right. It said these two sides are going to figure out a way the strait of hormuz open It may not be an everlasting peace. But we're just going to kick the ball into the high grass and have temporary piece that allows business to do business And the market just rockets up to a level higher than it was before And that coincides with a return of animal spirits around AI. That's phase three. It's like Yippy The war is going to end Either Trump's going to chicken out or the Iranians are going to chicken out or everyone involved is going to chicken out And then you get to May And since then, we're flat And I think that period, this last phase kind of like first second week of May through now, we're on a volatile path sideways that I frankly don't really understand very well. Obviously the AI story and in particular the microchip story is very prominent part of it, cause a lot of volatility. We've seen that in the last few days Um There are some mild questions about the U. S. consumer Maybe those are resolved now that the oil price is coming down, but there's worries about that And also the market is just exppensive. The SpaceX IPO has not exploded upward. it did at first, but then it's sort of weakened. There's questions about the further IPO's going. So we're like at a nervous top. right now kind of hitting sideways. That is exactly how I would characterize it to Nervous Top sounds right to me. And we will get into what we think will happen next because that is obviously the question that everyone wants to answer U, But let's just linger for a moment on the history of twenty twenty six because it is a fascinating one And let's just go through how someome of these different sectors have performed. I'm going to go back to my predictions that I laid out at the beginning of the year And sort of check in on how they're all going so far, and then we can sort of get into it. And by the way, we had you on the show as well, and you also made some predictions. so we're gonna to go back to God, this is horrible. I can tell you're a young journalist because you actually keep track of your own predictions. Very unwise thing to do. The good news is you mostly did well. Most predictions, they make good copy, but then they're wisely forgot Well, that's what this show is all about. So Just going back to my prediction. So my big prediction was that returns in twenty twenty six would be met And my number for Mh is low single digit growth returns. My view was that we had an AI bubble that was forming, but that it wouldn't be as spectacular of a collapse as most people would think. My view was valuations were expensive. we were kind of due, but also we had this big deficit spending that was coming in. I also thought interest rates would come down. That is no longer true. So that changes the whole story But ultimately, my view was we would see kind of m returns. So far, we've seen pretty good returns. So I would say that that prediction so far isn't correct, though I will hold to it at the end of the episode Some of the more specific predictions I made I thought that the equal weight S andP would outperform, that you basically have outperformance from The rest of the SMP aside from the top ten. And so far that is true. That has happened. Yes, it certainly is. And I have stuff to say about why that's happening. actuallyually. I think that's that's a particularly interesting one Please. let'sar it. Let's hear it. Equal weight is up eight and a h fivealf percent this year. It's outperformed. The regular SMP, which of course, for our listeners, that is more dominated by some of the big names, the big tech names like meta, like Google, N Vidia, Microsoft, et cetera. And those companies, those stocks have not been doing very well in comparison to the rest of the market. Let's hear your views. Something really big happened back in the first or second week of May, which was that the companies that have been leading the market for five years or more Whenever the market has gone up, it's been led up byy the magnificent seven ple alphabet Tesla, Microsoft, Amazon. You'll remind me the ones I'm forgetting. M. Yeah. That has been the consistent pattern. When the market is strong, those stocks are strong. When the market is weak, those stocks are weak changed in May And the leadership of those stocks just completely fell away. and we can talk about them individually, but none of them are doing especially well since then. and they have been replaced in market leadership buy silicon stocks And if you think about where our heads are at AI This makes perfect sense. right? This is actually quite a rational change in leadership becausecause we know for a fact the next two years is going to be all about building artificial intelligence infrastructure. And we know for a fact that they's going to require a lot of memory chips and a lot of networking chips and GPUs and everything else. Those companies are making out like bandits and there's no reason to expect they will stop making out like bandits anytime soon Whereas the implications of AI For the business models of the Magnificent seeven, in particular, Microsoft Alphabet, Amazon and Meta Far from clear couldould be great for them. couldould not be so great. And so like, you know, I would hate to make any predictions about that. And I think the market in general after having made a bundle of money in those names for years It's like, what's the next step in them spending a lot of money They used to be free cash flow machines. are not free cash flow machines anymore Right? And so like part of the nervous top here is about that change in leadership, which I think is super interesting. It's super interesting. And I like the point that you make that it actually is rational because they're basing it off of free cash flows, which I don't know if you saw this chart that went viral. I forget who put it out, but basically just shows what's going to happen to free cash flows and what has been happening in the last year or so and what will happen in the next year or maybe two, is the free cash flow for the big tech names just falls off of a cliff Meanwhile, the rest of the SMP continues, not because they're not making lots of money, but because they're spending ridiculous amounts of money on these data centers specifically. and those names have been falling. So just going through like how has the AI trade gone so far I the way we would say it we would put it is it's gone badly for some names and incredibly for others. and just to put some numbers to the narrative you're describing here AI infrastructure stocks have risen twenty seven percent year to date. AI chip stocks have risen one hundred and four percent year to date. and memory stocks, so companies like Micron, SandDisk, Samsung those memory chip manufacturers, those stocks have risen collectively two hundred and seventy percent year to date. the hyperscalers, big tech, they're down eight percent So it's at total switch. So let me tell that same story in a slightly different way. Yeah. I have a list from me. This is since may the fourteenth. Right. So about a month ago, and I'm looking at the S and P five hundred stocks Who are the biggest contributors to the gains in the market and the bigger losses. So the top ten Dollar contributors is not percent change, but dollar contributors to the market. Micron, number one. Applied materials number two in the chip industry, Dell technologies supplies servers to data centers Then somebody from the outside, JP Morgan Chase, mayaybe you could argue they're financing this whole thing. whoo knows. Number six, Lamb research. Number seven suppupplying drugs to the president of the United States, Eli Lillian Company Number eight, Sandisk, Chips again. number nine, Marvel teechnology, Sandisk again. number ten, Intel Corporation, Chips. eleven, KLA. list goes on like this. Now, let's go to the opposite end of that list. are Who's contributing losses dollar losses since may fifteenth. Here are the bottom five biggest dollar loss contributor, interestingly, also a chip company Nvidia set up lousy mon.ow. This is kind of the exception that proves the rule that it's total chip leadership here. But after them Alphabet, Amazon, Microsoft you know, these companies are going backwards right now It's fascinating to see it and a total reversal of the trend that we've that we thought was going to happen. But I mean, in a funny way Many of us kind of expected this. becausecause these valuations had gotten very high and we were kind of expecting some level of pullback, I don't think we were expecting to see that all of that would be made up for and then some different companies in the AI trade. I certainly did not say anything in my Predictions episode at the beginning of the year about how you should buy chip stocks and memory stocks. But if I had, then everyone would be very rich. Oh boy. I mean this is the horrible thing about you know, massive successful trades is they always look so obvious in retrospect. It's like, it's a gold rush buy the picks and shovels It's a cliche. just do it And you're sitting there like being all smart, like, o, I'm looking at all these different charts or whatever. sometometimes it's like, just do the obvious thing, you idiot, you know L at our charts nerding out. Tking about free cash flow. Yeah, exactly. Just like they need a lot of chips. whyy not buy the chip companies? you know? But that does beg the question of will it last? And I would argue, probably not. I think we saw that in the level of volatility that we saw basically in the past week where those names, SK Hinx, Micron, Sandus, they just got obliterated. Then of course, Micron comes out with these incredible earnings and suddenly the optimism' back It certainly is a question. How will these chip stocks keep informing? I mean, I was talking about this with my partner in crime, Katie on our podcast. Yes, bigig fan of hers. Watching Micron stock. going into earnings was like a real time look into the emotions of the market. one hundred percent Gin know, it was fike. It was down. It was up. It was in between. is like we know that coming down the pike we're going to get earnings out of this thing and it's probably going to be really good news, but if it's only just good news, the market's going to freak out and it was like that line was all over the place. You could see the vaccillations between greed and fear happening in real time. Exactly, which seems like that will be the characterization of the market going forward over the next few months. that's May, as you said, that's the the final stage of H one If I could just keep us moving through some of my other predictions here. and evaluate them. So I said the equal weight one Boom, I'm right, great. We'll see what happens at the end of the year because that was what the prediction is about, but we'll say. Moving on, I had two sector picks that I thought would outperform because I thought you'd see a rotation out of tech My pooks were consumer staples and healthcare. Consumer staples was true We saw this huge bump at the beginning of the year So it immediately proved right at which point I actually decided to rotate out of it a little bit, but it's still strong up around nine percent. healthca Ron. down less than one percent. So it's roughly flat, but given the fact that the rest of the market has has grown, that wasn't that wasn't right or at least that hasn't proven to be right so far. I like that as a long term call though. I feel like The sector of the economy can has the most to gain from efficiency improvements from AI is healthcare It's a third of the economy. It's an inefficient mess Like we've been waiting for AI and health carere our whole lives in some way. you know? So I'm I I like the healthcare call And everything from hospitals to insurers to drug companies to the rests, like You know, this could make a difference. And one of the few, one of the only sectors in the markets right now, which is cheap, which is actually trading as a sector below its five year price to earnings average. If you're going to make a big bet on healthcare, you have to think about populism and healthcare Right. And like both parties are quite populist right now And One thing populists like to do is beat up on companies in that industry, whether it's insurance company, drug company or whether. Trump is the same way. You know we I was at the FT Weekend festival last weekend and I was U watching Ram Emanuel talkal He's running Uh, you know, and, you know, he took out the stick and had a couple of whacks at the insurance industry. You know, because why wouldn't you So anyway that's one to think about as you invest in health carere in years to come. one hundred percent. That incredibly tied to policy. and that's what we saw last year. I would argue that's kind of what's been priced in Is that overhang from from political pressure, but it's one hundred percent. I mean, that's what you have to focus on if you're investing in that sector. Just going through again the Brition small caps outperform so far it's true Russell two thousand is up nineteen percent year to date. That's been a great call And it makes you think and if the Russell two thousand is doing well, And the other small cap index is doing well. That makes you feel a bit good about the U.S economy actually, because those earnings streams are very much tied to the US economy. The Russell index has a lot of wild speculative stuff on it. S and P six hundred is less speculative, but it's up too You know, and something we have to talk about when we talk about twenty twenty six. Earnings have been good And that shows up in your small cap bed We'll be right back after the break. and if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts When you need to build up your team to handle the growing chaos at work, use Indeed sponsored jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this shel will get a seventy five dollars sponsored job credit at indeed dot com slash podcast That's indeed. com slash podcast. Terms and conditions apppply. Need a hiring hero? This is a job for indeed sponsored jobs. Support for the show comes from Upwork. It takes a lot of energy to run a business and there's nothing that drains your energy and your business more than hiring. 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That's upwork. com slash markets to connect with top talent ready to help your business grow That's UpWorK dot com slash markets uppk d. com slash markets Support for the show comes from Odoo Running a business is hard enough. So why make it harder with a dozen different apps that don't talk to each other One for sales, another for inventory, a separate one for accounting. Before you know it, you are drowning in software instead of growing your business This is where Odu comes in Odu is the only business software you'll ever need. It's an all in one, fully integrated platform that handles everything CRM, accounting, inventory, e commerce, HR and more No more app overload, no more juggling logins, justust one seamless system It makes work easier. And the best part Odi replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business whether you're just starting out or already scaling up. Plus it is easy to use, customizable, and designed to streamline every process. So you can focus on what really matters Running your business. Thousands of businesses have made the switch, so why not you? Try Odoo for free at odooot com. That's odoo dot com We're back with Profty Markets fininal prediction here, I thought that non US equities would continue to outperform So far, that has been true The MSCI World Index is up thirteen percent. So international socs are outperforming As Michael Semblis pointed out in his recent research note, the reason that international stocks are outperforming is basically because of three stocks TSMC Samsung, SK Heinnix, all Chip stocks. So that's another story of the chips are the ones that are pulling up the rest of it. And if those didn't exist, you would not see that level of outperformance. So correct, but not necessarily for the right reasons there. Yeah, but they all count Uh in in investing, you know Right is right and wrong is wrong. So Good for you. I think that I think you countounted yourself pretty well there. I had I think I think I did not bad. Now I'm gonna go to a couple of yours. Oh God, I'm like dreading evenar it.on'try sorry. D't worry. you're good. You're good. You only got one wrong Okay good You said We are in an AI bubble, but it won't pop this year So far That's been true. But I'm feeling a little queasy about the second half We will see God. You said US stocks will not underperform non US stocks. So far, that has not been true. But it's that special phenomenon. Yeah, yeah, yeah. Exactly You said Fed the Fed funds rate will not end the year below three percent. so far that is Definitely true. And you also said and this is probably your biggest win, that the biggest risk in twenty twenty six will be inflation. And so far that has been very true and more true than a lot of people would have predicted because it has risen China spectacularly after Iran, now there's a question of will this last? Will it continue? But so far, that's very true. And it's especially reflected in the interest rate conversation, which of course, has been the biggest shift. Everyone thought interest rates were coming down into twenty twenty six. Now everyone believes they're either going to stay where they are they might go up because of inflation. Energy inflation is a special case and It's, of course a price people pay. You can't just put it aside. It affects the economy you know, if that if energy inflation is high, that eats into real incomes and drags on growth. But in terms of things like rate policy, sustained inflation, et cetera, et cetera, it's core inflation. that we're worried about taking energy out And that thing will not go away Right? It's sort of like some you have a hopeful month, you have a bad month, but it just Service and inflation in particular. above target and we're not moving in the right direction Moving sideways at best may be worse than sideways. Depending on which month you're talking about. So this gets us to some of the recent data we've seen. Obviously CPI hit four point two percent in May the PCE, which is the Fed's preferred inflation measure bolstered the point. It K just came in at four point one percent Um, and then I think What's really, I mean A big question has been S inflation goes up or that it sticks around. And that was your prediction and it appears to be playing out What does that mean for people? Why does that affect? I mean, we know what it means for consumers. We know that it means that your life is more expensive, especially if it outpaces wage growth, which it is right now. But the question Investors are asking is what does this mean for stocks? Is this a bad thing The stocks. And I'd be curious to hear your views on because this was one of your predictions is One of the biggest risks to the markets, not to just American people, but to investors is inflation. And we all seeing that kind of play out So how do you view it at this point? huge amount of different stuff to unpack. But let's just start with the history U, the history is that of the last going back twenty five years, whatever it is When you have a rate hiking cycle which if you have inflation, you will eventually get a rate hiking cycle The Fed, you know, probably is not going to put up with this forever That has coincided or correlated with ugly market corrections If you look at the last three or four corrections in the last three or four rid hiking cycles, they do, I'm not saying anything about I'm being very careful not to talk about causation here. Just talking about correlation. It's an important point to make. You know, the last big correction we had was was a trickier case though, right? Because it was the COVID correction And we'd been the rates had been coming up and then COVID hit And there was a collapse. So there's a question, wouldould that rate hiking have sunk the market anyway virus or no virus? Open question. But if you just look chart of the federal funds rate superimposed on the S and P five hundred, you start to worry about this stuff the correlation is, right? So Question that the massive question is Here we are bumbling along above target above the two percent target of the Fed, but not You know, it's like on a good month, you strip out energy and you're like do trimm mean or whatever statistical package you want and you get kind of Inflation is like two point seven and in a bad month it's like three point five And we're kind of going along sideways in this clearly above target by call it roughly on average a percentage point And, you know, the markets can probably live like that. You know what I mean? The difference between two and three You know, there's these discussions like When the Fed says two is the target, do they mean two is the first number of the target? mean O do they mean two with two point zero? Anyway. The question is if it goes up again I think that's a disaster. I think markets can live with ore inflation that's a percentage point above target. It has been living with it. It's not ideal or whatever It gets loose from there just can't see how Given what we know about the historical relationship given the instability that brings I just can't see how markets can stay at this high level if inflation is above target and rising again I don't know. you know, if I could predict inflation, I wouldn't be sitting here talking to you, that's for sure. But like that's but like so it's bad. If it stays the level of bad, it is now okay, we can live at that. If it gets to another level of bad, I'm scared. And I think this ultimately does this is where Iran comes back into the mix because Yes, we can strip out energy as much as we'd like Supposedly the straight is open The question of how long it will remain open, I think is an open question because I think We're dealing with a president who is irrational and has a tendency to exaggerate to the point of basically nearly lying, especially when it comes to how done his deals actually are We have the fact that this isn't really a deal, it's a pause that they violated within like a day And so how strong? is this? I then there's also Israel which is another giant question mark that was not involved in this deal. And if Israel strikes Lebanon or continues to strike Lebanon, then Does that mean that America violated the deal? Does that mean that Iran will then get angry again and say no, we're going to use our leverage, which we just realized in the past year, which is that we can either close the strait or just charge everyone who comes through it? which they could easily do, which would also increase oil prices. And all of those questions go back to your big point. which is That could increase inflation. and if it does, it could mean that inflation remains above four percent. And if that happens interest rate hikes, which as you say, are kind of go hand in hand with bear market. I think the reason the market was so confident All the Lord there would be some kind of resolution in the strait was recognition that that Both sides . needed the hot war to turn into a cold war for a while And so you know, I think the market is probably right that the central hypothesis is that Uneasy peace continues for a while I might if I was Iran, I might want I don't know, what do I know about Iran? but you know, I might want the uneasy peace to last until there's a different president, maybe. And the president might want the uneasy peace to last until there's another president, by the way. So like I agree with you. It seems like a fake pace But for the market purposes, fake peace might be enough Do you know what I mean? We're refilling oil inventories, whatever, But I agree with you. It's unstable and it's a question mark. And I would say your point is generalizable that You know, if you start saying, well, if you don't this shock. Oh, we had the COVID shock, we have the oil shock, we have the AI shock, we have this shock. Well, we seem to live in an age of shocks. And they they, you know, they seem to be, you know, supply shocks of one sort or another, sometimes demand shocks and they keep happening Of course Specify at the outset that you're not counting every unexpected thing that happens into the economy into your inflation calculation, you're probably going to end up with a view that inflation is pretty low But shocks happen, right? So anyway, you know, I think, you know, inflation followed by higher interest rates is the big risk. But I'm not predicting it, but it's the easiest way to see things coming off the rails. And to your point, I mean Just looking at the price of Brent Crude right now, it's down to around seventy four dollars a barrel.'s highigher than it was before the war, but barely higher. It's basically where it was And yet we are living in a time where to your point, the uncertainty around that strait is inarguably higher. There is certainly higher confusion, higher uncertainty, which could lead to a problem. But what we're counting on is the optimism of traders to keep that price low And that's how they feel and it actually works in preventing inflation from getting worse. I think we did learn some things during the crisis about the flexibility of the world energy system And those things are mostly encouraging You know, I mean, it would have looked a lot different if the straight had stayed closed for another couple of months and we really hit the end of oil inventories But we were able to burn inventories, supppply chains moved around. There was some demand destruction So you know, you have to say that the world energy economy performed pretty well under strain And so I think that's a little good news coming out of a rather dreary period history I'm going to move us on to our thoughts on what might happen in the second half and it's certainly related. I have a list here of the biggest question marks So H two twenty twenty six And the first one on my list is what we're talking about It's Iran, specifically when and how The Iran conflict will be resolved or if it won't Um O when we look at the probabilities on Kalci, the chances of a quote real deal are very low. It's twenty three percent happening before September, forty six percent happening before twenty twenty seven. So that's people betting on Will we come to an actual resolution where we sign and the war is over But that might be a different question from willill the strait remain open? I mean, my prediction on this is You know, I wouldn't bet my house on it, but We're gonna keep faking it Right. We fumble through, we kick the ball in the high grass. We grope our way along. it's never resolved, but it doesn't heat up again. That would be my guess U but it's no better than it guess. I don't wan even call that a prediction. Yeah Yeah think I think that's right I also have here, will inflation get worse? and this is of course related. I refuse to predict. you make a prediction and I'm going to watch. I'm not'm not I'm not going toict predict Well, I kind of well predict. My prediction at the beginning of the year was that Inflation would hit four and a half percent or not the beginning of the year it was just as we were getting started with Iran. My view is that this was going to last a lot longer. I thought it would hit four and a half percent by the year end. We're at four point two I think I hold to that prediction Um, but I I mean You know, I was listening to Mark Zandy who we have on the show. I think you've appeared on the show with with him. and he he believes that we're cllose to a top. in with inflation U that it probably won't get worse. I don't buy that personally, but that is kind of the big question. It sounds like you believe that it might get a little bit worse as well. I'll tell you one thing If you're planning on buying a Mac book, you're going to get more than four percent inflation. I mean, we got that news from Apple today and I'm going to now say something that is an idea that I'm outright stealing. And let me credit the person I stole it from was a guy who had a cup of coffee this morning. former Reuters journalist called Rob Cox. and he pointed But it's not just, you know, Apple comes out and says, you know, the memory chips are very expensive. We have to increase the prices on the phones and the laptops and the tablets and so forth. Fine price of Ale goods are a very important price in our economy Right? That is a very salient price in people's minds is, you know, we a lot of us use iPhones, a lot of us have iPads, a lot of us are Mac people. and that is there that like that's a price that everybody can see and noose going up So I wonder if that is like a signaling one. It's not just computers when Apple does it becausea apppp's apppple was saying anyway, I'm just throwing that idea out there because I thought it was a good idea from Rob, and I wanted to repeat it. I think it's important and also important in the context of how the American public views AI, specifically how much they dislike it Because what we know and what Tim Cook has said outright is the reason that we're increasing the price of our computers and our phones and our chips or excuse me, our Mac minis, is because the price of memory chips has exploded to a degree that I've never seen before. and the reason that's happened is because everyone's trying to build a data center And so that is another link. Every word of that is true, by the way. All of it's true And if you're if you don't like AI This is another reason to not like AI even more because the reason your iPhone, if you wanted to upgrade, has gotten more expensive, is literally because of AI. It's because of data centers. So the machines that are coming to get you fired and make electricity more expensive are also making your iPhone more expensive. Now I wonder why people wouldn't like that technology What a mystery. What poor misinformed people? That's exactly right. The you're fired machine that makes everything expensive. f That's exactly right I don't know if any of that's true, but that's the perception very clearly, you know. We know that it's true in terms of making things more expensive. That much has been proved. We'll see about that you're fired thing, exactly. So And that by the way, and we can get to AI in a moment, but that could be a huge obstacle in AI's way. In fact, it seems it already is But I'm just going to keep moving through my listed question marks I think that this is the biggest question mark And no one is able to agree on this is what will happen to interest rates? Um, we We've seen different predictions made by different Banks, JP Morgan. Global research said that they believe that the Fed will hold rates for the rest of the year. Goldman Sachs also said they're not expecting any cuts. They think that they will hold or that they don't think it'll rise either Um Bank of America said they expect three interest rate increases this year. So there's dispersion in the predictions. That's what makes our job fun, right? We Not everybody is on the same. is seeing the same stuff here. And part of that is simply because Got a new guy in charge of the Fed. And we don't know we don't really know who he is. And we're going to find out over the next few months. I'd be interested to hear your views on this. I think that is a big piece of what's going to happen to interest rates, which as we said, as you pointed out, that basically could determine what happens to the stock market in the second half of the year. If history is any guide, it will be. I mean, I think Kevin Warsh who's the new head of the Uh Okay how I describe him. and I don't mean this to be as critical as it sounds I call him the dog who caught the car And what I mean by that is he's literally spent most of the last fifteen years crriticizing the Federal Reserve He was on the Federal Reserve back in the financial crisis. He parted ways with the Federal Reserve partly because of disagreements about balance sheet policy or whatever, back in like twenty eleven or something like that, he left the Fed. And since then He's been suing a fair percentage of his time giving speeches about how the Fed is screwing everything up And now it's like, oh, thanks a lot, wise guy. Here's the keys So As a journalist I'm very sympathetic to people who sit outside of the game criticizing the players. That is basically my job. So I don't want to criticize such people court, but this is a case where he's going from Thinking he knows the right way to do it from the outside to being on the inside and being under all the pressures that go with actually running the thing Point number two is of course there is a question about whether he will be bullied by Trump As I've been saying all along, I think I've said it on the show here before. I don't think that's an issue Two reasons. One Dull Trump tried to bully your own pal And it really, really didn't work. You know what I mean? It was a complete failure, right? His bullying efforts probably made things worse from his point of view Right? So ed work into the chairman of the Federal Reserve is not going to be, it doesn't matter whether the president likes them or not The matters to someone who has that job is who am I in the eyes of history? And if you are the chair of the Federal Reserve, under whom Inflation got out of control you, your grandchildren will be hearing jokes about what a crap fed chair you are. You will be rememberered this is Arthur Burns is the Fed chair who famously let inflation get out of control in the seventies You don't want to be that guy So I think he's going to have his eye on the ball in terms of inflation Does that mean he manages it perfectly or anything like that? I don't know, but I don't think the president is gonna to intimidate this guy into doing anything We'll be right back. And by the way, Scott is going live with his predictions midy check in tomorrow, june thirtieth at three PM. become a profG plus subscriber on Substack to tune in. that visit proropertymedia. com slash subscribe. P for the show comes from Cohere, As AI advances, one thing matters more than ever, staying in control. 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So you can spend less time worrying about insurance and more time enjoying the ride. Download the Statefarm app or go online at statefarm dot comot like a good neighbor State Farm is there. We're back with Profty Markets So if you're watching on YouTube, Robert was just kicked out of his office at the FT, I guess I guess they don't respect you enough over there. So that's why it's got a bit different background. But I was asking you right about Kevin Wher's anti fetishness and also the fact that He has signaled that he does not want the Federal Reserve to be communicating as much to the public about what they're actually doing, which has been a large point of controversy. I personally can't figure out why any of that actually matters on the big decision which is basically interest rates. Possibly interest rates in the balance sheet. Call it those two together. Yeah. What are your views on on his I guess anti fed philosophy. The communications thing is a bit weird and let me give you first the case against his approach. His thing is we don't want to give The market's guidance on what we're going to do. We want to say what we have done But we don't want to talk about the future. We're going to take for what they call forward guidance out of the statement which is the kind of slightly coded language in the press release that comes with every interest rate decision that sort of gives you a way to predict which way they're leaning the next time He doesn't want to explain what they call the Fed's reaction function which is a he doesn't want people to have the thought Yeah The employment report does this. The Fed will do that You know what I mean? They knowt he wants you to know less about what we're doing. And he said this thing in his first press conference about this, which was complete nonsense and not true which is he said We want the market, We want to know what's going on by looking at the market and we can't do that If the market is filtering all the incoming information through their idea of what we're going to do. So it's this idea that like the signals the Fed is getting about the economy will be distorted by the fact that we give forward guidance To me, this makes no sense whatsoever because you can be damn sure the markets are no matter what the Fed does. How the markets respond to the economy is going to be conditioned by who they think the Fed is and what they think the Fed's going to do It's always going to be a muddled signal So I think that is just a silly story that he's telling Joseph by himself This is what I think is really going on. He is a person. who thinks the market counts on the Fed as a backstop. And he wants less of that to be happening He wants the market to be more volatile and more scared because he thinks the market is too dependent on the Fed put and Fed put like stuff. If we get in trouble, if we leverage ourself too far, if we whatever, the Fed will always bail us out And he wants to take that anesthetic out of the system. And I think the communications policy is part of that Like you guys figure it out for yourselves. And if you find that scary, if you find it scary to operate without us telling you what we're going to do, good. I want you more scared. That's how I like it You know, that would be my interpretation of that. And we will see how that goes. So there is a kind of, there are no atheists in fox holes Aspect to this, like it's all very well and good. to say you want more volatility in the markets until the shit really starts to fly And then we'll see how you feel about volatility. In other words, When there is a crisis and institutions are falling over and they're begging for lines of credit from the Fed. Uh What's the Fed going to do? When you start shrinking the balance sheet, which is something that he wants to do, you know, he's very keen on shrinking the b I should say more, shrinking the balance sheet more And there's a crisis in the money markets. How much of a tough guy are you going to be then So we you don't really find out what kind of Fed chair you have and what kind of Fed board you have until they're in a difficult situation. And then you take the measure of of what they're prepared to do and not do which is all makes it scarier for Wall Street in the scenario where there is some sort of shock or crisis or extreme bear market, becausecause what we had in previous crashes was what was of course, the Greenspan put, Alan Greenspan who recently died, who this was kind of his doing is this idea that the Federal Reserve can come in and prop up asset prices such that prices don't go down. And it became a theme. We saw it from Ben Berankke, we saw it from Jerome Powell. And to your point If you've got this guy coming in saying we're not doing that anymore. So if you guys want to go have your AI bubble and things crash I'm not saving you. Now, he's not saying this explicitly But I think this is the subtext. That's my interpretation of the subtext of what he's saying. New sheriff in town We want to let markets be markets. Yes, which is a really interesting interpretation, which brings us to the next big question mark on my list here, which is Will the bubble burst if we believe that there is a bubble? And it does seem this was a conversation that was being had in the fall of last year And there were a lot of question marks around this. Our view was that a bubble was growing but it wasn't about to burst. and it wasn't like what we saw in the dot com era because you didn't see these prices I have a new view, which is that actually prices are like what we saw in the dot com bubble. and that is we can look at the SillerPE ratio, which is the cyclicically adjusted price earnings of the S andP It's currently at forty one And during the height of the dot com bubble, it was forty four. So it's in that territory and the historical average is seventeen point four. grranted, it's been a lot higher in the last several decades because stocks have just gotten more expensive. But the reality is this is The second most expensive stock market of all time is now. The only time it was more expensive was right before it crashed. from ' ninety nine into two thousand So This is now a real question to contend with. What do you think? As I'm sure I've said on the show before because I repeat it whenever I get a chance just to humiliate myself, the thing I have done that has cost me the most money, know with my personal investments and my savings is try to get out of the way of bubbles trying to anticipate a bubble. can turn into an extremely expensive hobby because you miss out on a lot of gains And so I would never, if the price momentum was still headed to the right I would say Edge you' crazy, you know, be there' no point predicting a bubble this year. It's not happening soon makes me slightly nervous is the determined sideways movement of markets over the last six weeks or so the market tries to rally uh and it kind of can't And that now that means we're between trends. We're not in an uptrend and we're not in a downowntrend And let me give you a metaphor for this that actually has a nice resonance with a standard markarket metaphor. When I was a young and very stupid man, I went to the rununning of the Blls in Pamplona, which is a kind of classic thing for a dumb young American to do. That is stupid I love it, I love it. Yeahah. It's first thing in the morning and you're like, you know, had an hour of sleep and they're about to release these bulls into this narrow road and you run along with them You're starting to have second thoughts. And I remember asking the Spaniard I was with for advice And he said, donon't worry, this is all very safe As long as the bull is just running down the road. A bull that's going one direction, you can just run along next to it and you're fine If one of those things falls over Get out of the way as fast as you can because you don't know what direction it's going to go when it gets up Right? You know, as long as the bull is pointed one direction, you are good likeike literally because they'll one of them will wipe out you know, going around the corner and it could start coming back the other direction. And it's the same thing with markets. A market with no trend is bit unsettling, right? And I feel like right now we're in a market with no trend. you know, look, it's not going to change my approach. you know, I have a fixed allocation. I stick to it. you know,'m, you know, I'm only in ETFs, I'm diversified, et ccetera. But as an observer of the market, trendless market is a scary thing. and there's a good example of this just today So We discussed how the markets were very nervous heading into the micron earnings Micron earnings finally land and they're terrific. Micron is up, I don't know, fifteen percent or something as we speak. I don't know The NasdAQ today, still down Hm So we got the good piece of news that everybody was looking for. It was better news than even everybody expected. That stock, I'll just look at it now is up seventeen percent NazAq is down slightly What's a man got to do to get this market on So that makes me think we are we don't have a trend and it could go either way. I think it's a really important point. Yeah. You know I mean, And is this is a mathematical point, by the way, made about, you know, all markets everywhere by the famous Benois Mandelbrat. And if I can recommend any book about markets to your readers. it's the misbehavior of markets You know, his point is this is the pattern of markets They have a trend They have momentum. They don't move randomly. You know, if they're going up, they're more likely to keep going up. if they're down, they're more likely to keep going down. And then the trend breaks And there is a moment of chaos until the new trend forms. And that's true at the micro level, like on a given day, a given trading session, it's true over ten years. it's kind of the fractal pattern of markets And we're at one of those intermediate periods right now, I would argue. It's a really, really good point. And it reminds me of something that Barry Rithold said when we had him on the pod a couple weeks ago where I laid out to him my views on This feels like it's we actually are in d. com territory at this point And he said, sure, but SpaceX just went public and it absolutely exploded. And as long as people are feeling good and things are going up to your point about the trend, then you know you can keep predicting the bubble as much as you want, but prices is gonna to keep going up and you're gonna lose out on all of that. All you're doing is getting poorer. What have we seen in the past week, two weeks, SpaceX came Crashing back down. and And if we're thinking that the an I mean, at this point, I think we can all agree that asset prices are very pricey right now U don't I don't think that's up for debate. I mean, you look at every sector, you look at tech, you look at energy, industrials, materials, consumer, everything is expensive. Everything is trading on a multiple basis, a lot higher than they historically did. Yes, earnings are growing, but those multiples are growing too And so if we're waiting we're waiting on something to break the momentum And it does seem that we're in that moment where the momentum is wavering. And the momentum can resume You know, if you told me Micron is going to crush earnings and the market's going to take off flying again on Thursday morning, I would have believed you But that's not what's happened here this morning. You know what I mean? So it could go either way. I am, you know, it is reassuring that the US economy is okay, US consumers is okay and that profits are good. That is a more helpful background than you would otherwise have. Although there also seems to be a little bit of wavering on the consumer front. We did just see the revision for the consumer spending in the first quarter. Consumption iss a little softer Yeah, ye. And if that continues again, I think this goes back to Iran, I mean, then That's the real question for corporate earnings And it does remind me of twenty twenty two. where you had The stocks were expensive 've Just going back to the SillaPE, we hit forty in January of twenty twenty two Th then you did see a drop off in consumer spending and it was really triggered by the inflation shock that we felt coming out of COVID And the Fed finally started putting the hammer down on rates It was like for the for the seven thousand thirty portfolio was the worst year anybody alive can still remember basically is because your bonds because it was inflationary, your bonds were no good And the stock market was going down. so you lost coming and going. It was a terrible year Um You know, like If you said, you know, the market it's going to lose a third of its value Uh, you know, what, I mean, it wasn't a third, but twenty twenty two, we survived. You know, and we could survive another crash here. I mean, this is a maybe a question for another hour There's kind of crashes and crashes. you know, if the market goes down a third, let's just say from where it is now, which would bring it back into its normal valuation range historically or whatever. As long as there's not awful secondecond order effects, That's kind of fine. It happens once in a while. A lot of those are paper profits Uh, you know, c, you know, some hedge funds will go out of business But like that's a totally survivable event You know, the question is, is it a is it a third in the style of two thousand eight? where there are massive second order consequences that affect the real economy. You know In that case, there was massive second order consequences because the loccus was the housing market, which is the main asset of every American family. So it ca But so like, you know, like, you know, for a young investor And I think you probably your young manen yourself, you probably have listeners who are your age The market falls by a third. As long as you have a little bit of savings and cash, you should be getting up and cheering Exactly Right You know, that would be awesome. You know what I mean? So, you know, as as long as you're not one hundred percent in stocks anyway or you can access a little money to start some savings at the end of the crash, it would be a great thing. Right? So that's that's something to keep in mind Old people like me have to worry. We need the money now. Yes. Yeah. That's right. You know But for you, it's different. I think this is a really important point. And I think that Ultimately, and this is where I'm beginning to land on this, I think what we'll see, I think we will see a correction. I think it is as close to imminent as you can get I think it will look a lot more like twenty twenty two than it'll look like two thousand becausecause to your point, I think that knocking on would But I think that a lot of, I mean it's a lot less It's hard to argue that this bubble isn't systemic. It is systemic. But at the very least, It's far less debt financed, at least the AI buildout, which has been highly dependent on equity. Even though they are issuing debt now It's still mostly an equity story. Yes. And these big tech companies have the cash to pay for this stuff. They're starting to issue deebt financing and it's starting to look a little weird, but if you literally just look u at their net debt, specifically, you know, meta U Google. Amazon, you know, those's really big players. they have, they have cash And they can do this, they can take these risks, which makes me think that we'll see a correction more similar to twenty twenty two, which doesn't collapse the whole thing. I think it results in a year that's kind of shitty me for investors. That would be my prediction going into the second h No, I'll join you at that prediction. and I certainly hope it's true I think the argument you've made for it is very good. The only caveat to this is you mentioned that this is not as leveraged a financial bubble as the bubbles we saw in zero eight or possibly o one now The thing about leverage is you don't really know where it is until asset prices start to fall. And then you have these awful experiences like, who L what to what are you talking about? So it was like in two thousand eight you were like, European banks have a lot of leveragage finance in American houses I remember finding out and I was like, what is happening right now? You know what I mean? German banks, you know? And so it's like Let's just hope There is not secret leveraged love affairs going on in financial markets that we don't know about. You know, every once in a while I write a column about how leveraged is the financial system and every expert you talk to, they tell you the same thing. You can get a sense of it. But you can never know quite the extent of it. So this is the ultimate example of Warren Buffet, you know, you see who's swimming naked when when the tide goes out to the extent that you can even even know given what you just said. How leveraged would you say we are? My understanding is that on the AI side for the ones that matter, not so leveraged, but maybe that's not including a lot of other stuff. So there's a famous data series you can look at from FINRA, which is the industry's kind of self regulatory body which is the amount of debt in securities, margin debt in securities accounts And that line is up into the right hard Right. So there is a lot of leverage speculation in markets. I think you can find similar proxies for the leverage being provided by trade trading desks to hedge funds and so forth So I think there was quite a bit of that. It's not good. You know, I was looking the other day at leveraged ETF's There's a couple of these. They're not huge. You know, we're talking in the tens and twenties and thirties and forties of billions But like Y your NSDAq three X leveraged ETF has grown its ATM. So I think we can conclude that there's appetite. for speculative leverage out there. And you know, in a crisis, what what's happens with that is it The valance reverses and it goes backwards and That's going to happen. So maybe I'll need to rethink that one. Yeah. Well, I don't know. I think I think you're right within the circle of the AI part That it's but it's the question is people outside of that circle speculating on what happens in that circle. Are they using borrowed money to do so? Yeah. the answer to that question is yes, and I wonder the next question becomes which one matters more or do they both matter equally? Yeah, yeah. I mean, like I said,, you know, if it wouldn't be finance if you could predict these things in advance It's a dynamic system and It's really tough. My final question on my list of question marks and then we'll wrap it up is what will happen at the midterms? U Seems like Democrats are going to win, but Who the fuck knows? Not me And will the market care? I don't I'm not even sure it's a market event. Right. Do you know what I mean? Here's what I would say about the political side of things And I was talking to this if a very senior editor at the FT about this The I don't know if this is even the right word, like the amplitude of political madness seems to be going down. So like A year and a half ago, we were like arguing about Global trade rules And you know tariffing our allies Six months after that, there was like masked government thugs Aresting Americans and non Americans alike in the streets. Yeah that was crazy. I forgot about it. And now what we're doing is arguing about the reflecting pool. like so as a direction of change, I kind of like this. You know what I mean? Like I think this is actually it's funny, but it's actually quite a serious point. Like, yeah, let's freak out about the swimming pool. Great to that Love it. It is very interesting. But part of me feels worse about that because I'm almost like, are we just sort of H we gotten bored about the fact that we've launched a war in the Middle East again from the guy who said that we wouldn't launch any wars? I mean, I wonder if that's almost worse. like I mean, by the way, it's not like the tariff thing is no longer a debate. That's still playing out in the global stage. Yes died down, you know what I mean? It's Whatever happens in the midterm, Trump is a lame duck. So it's, you know, all of that stuff is kind of happening and maybe what we're seeing is You're quite right to mention the war in this context. You know, that's that that is true. But like I said mayaybe things are calming down a little bit you know, if there's anything I hate to predict the interplay between politics and markets Be you have to be smart about both And nobody is Well, I will just to your point on will it even affect markets I think my view is It won't and for one crucial reason, which is that The midterms are about what happens in Congress, and what we've learned about this new Trump presidency is that he doesn't give a shit about Congress and he'll basically just do whatever he wants. And here is our very interesting data to just support this point Trump has issued more than twice as many executive orders in this term than Congress has passed bills And that never happens. You look at the Biden presidency, It was flipped. He passed four times fewer executive orders than Congress passed bills. In Trump one, also, four times fewer. Obama, five times fewer, Bush six times fewer. suuddenly it's reversed. Trump is just spraying executive orders doesn't matter what Congress does, he's still going to do whatever he wants to do. Now, I would guess that the next presidential election might be very consequential for markets because basased on what we saw in my home state It could be a race between extremes. you know, the recent congressional races here in New York You know, if that's a race between the Trump and right and the AOC left. Markets are going to have no choice but to care because it's going to be wild, right? But that's