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Excess Returns
We Asked Ben Hunt, Jim Paulsen, Kevin Muir and Brent Kochuba Why Bad News Can’t Break This Market
01:07:48
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- [00:00]
Jack Forehand
We are excited to announce the launch of a new podcast, Last Call. While many market rap shows can cover the same ground, we wanted to try something different. We wanted to get away from what the market did in the past month and instead bring in some of our friends who offer truly unique perspectives and data. And we wanted to have some fun along the way. Our latest episode looks at the question of why the market isn't down despite war, an oil shock, and some signs of problems in credit markets. We talked to Jim Paulson and Kevin Muir about macro, Ben Hunt about narratives, and Brent Kachuba about the flows behind the scenes. You can subscribe to Last Call on all major podcast platforms using the links in this episode. Description thank you for listening. We hope you enjoy the show.
- [00:28]
Ben Hunt
We've, you know, had these two big explosions happen. The light hasn't reached our eyes yet and so we think they haven't happened, but I think they have.
- [00:42]
Jim Paulson
We had an excess demand driven inflation problem in the 1970s that required appropriately massive tightening to get rid of, to shut down demand to bring it back in line with supply capabilities. That is not what we got today.
- [00:57]
Kevin Muir
When you put all these things together, Matt, you realize that a lot of the bear cases is longer term in nature. It's not something that's happening today or tomorrow.
- [01:10]
Brent Kachuba
This actually is not conducive to the market just falling apart. And I think this is one reason that we have not seen sort of the sum of all fears, the realizing of downside Foreign.
- [01:31]
Matt Zigler
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use or better questions lead to better decisions. This is Last Call. I'm Matt Zigler, that's Jack Forehand. You're ready to try to talk about this month that just happened with some of our favorite people?
- [01:47]
Jack Forehand
Jack I am, but before we get started, Matt, I mean we got to talk about oil a little bit because we just got off this private jet. I mean I don't know if you've been holding your half of the bargain here in terms of a little money for the, for the gas here, the check a little expensive.
- [01:58]
Matt Zigler
The checks in the mail. The checks in the mail. That jet fuel, you know, it's not my, it wasn't my choice to stop in the UAE on the way over. I didn't know it was going to get like that. You were the one who had to stop to hit the gold atm. I heard.
- [02:12]
Jack Forehand
Maybe someday we'll actually, we'll actually get the private channel. We'll actually be able to talk about this, but it's probably unlike.
- [02:17]
Matt Zigler
I'm just hoping there's still six people who think that's real. That's, that's really all I.
- [02:21]
Jack Forehand
There have been a couple in the comments who actually did, did believe it was real, so. But hopefully they're still out there. But we've got an incredible lineup today. You know, if you wanted to look at what's going on in the market through a bunch of different lenses, we've got everything you could want. We've got Jim Paulson and Kevin Muir. On the macro side, we've got Ben Hunt on the narrative side, we've got Brent Kachub on flows, we got brand new interviews with all four of them. So we should kick this thing off.
- [02:42]
Matt Zigler
Yeah, brand new interviews, short and tight, 10ish minutes each. Some of our favorite people just to check in and say, hey, what just happened? What do you think comes next? I'm actually really loving that we do this because then I show up to investment committee meetings and I sound really smart because I get these sound bites. And so you at home, I invite you to do the same thing, steal from these people. So before we get into it and start playing clips from these guests, we're going to do the look back.
- [03:08]
Jack Forehand
I would think the biggest story is why is the market not down? I mean, the thing I talk to most about clients with is probably that topic. I mean, we've got an oil shock, we've got a war that doesn't seem to be resolving. The market just keeps going. And I think so many people are asking the question of why. And I don't know if you're hearing the same thing.
- [03:24]
Matt Zigler
I'm hearing exactly the same thing. I keep going back to the Brent Kachuba or no, the Brent Donnelly. Wrong Brent. Too many Brents and then Brent Crude. You got me all thrown off of my game here. Brent Donnelly, who had that line about bear markets and down markets require successive bad news. So it's bad news on top of bad news on top of bad. Like you get no respite in a real bear market. And I think what's wild here, ever since he said that, it's, we have another event, we have another economic number, we have another piece that hurts. And then it's like, oh, blowout earnings. Oh, strong, not so bad employment data based on the headline interpretation, even though we know that's probably not right, that breaking up of the bad news with reasons for optimism. Seems like that's what makes this so hard to bet against right now. What do you Think, yeah.
- [04:12]
Jack Forehand
And I was trying to write down some reasons. I think, you know, one, I think there is this anticipation of buy the dip that's kind of come in. Like these dips have all been so small and they've been bought so quickly. Like people are trying to get ahead of it now. Probably the anticipation of some sort of resolution, slash taco, whatever you want to call it, that's probably part of it too. But also I think. And this kind of gets out. I'll read this Warren Pies tweet because I thought it was really good. He just had it out yesterday. He said, August Brent up 20% in 10 days and equity is still resilient. Tells you two things. One, DE escalation without a reopening is losing its power to cap oil physical market biting. And two, equities are seeing something pretty bullish on the quote, other side of this. And that second thing is kind of what I was thinking about is like there's some, I mean AI is kind of the thing that's just floating out there right now and it's this transformative thing and the market has a way of seeing through maybe some of these blips on the radar. Not that this is a blip on the radar, but some of these short term things when we've got a big long term thing coming. Like I remember when just recently, like what's going on with semis is crazy. So it's, it's almost like the market is anticipating that, I think to some degree. I don't know if you agree with that.
- [05:13]
Matt Zigler
I completely agree with that and part of it too. So number one, buy the dip. You got peak to trough S and P was off what, 9%. Nasdaq was off like 10%.
- [05:22]
Jack Forehand
I think it almost 10. Yeah, I think that's right.
- [05:23]
Matt Zigler
Yeah. The S and P I think just almost got there. NASDAQ just got over the quote, unquote 10% arbitrary correction line. So you have everybody who's looking for something approximately like that who wants to go and buy because earnings have been so resilient. And I know we've done a bunch of things with guests talking about forward earnings that made everything cheaper. And I think this is one of those annoying things. This is one of the investment committee lessons that I'm going to bring back into the, bring back into this conversation too, which is where the, the trained stewards of capital with the right letters after their name and all the things, they're like, look what just happened to valuations because you got that 10 drawdown at the same time you've seen the expectation of double digit earnings growth hit this market. So when you put that combination into play, how do you not buy the dip? If you have any type of long term valuation focus and you trust or believe these numbers, that's a real incentive for the other side, which is what Warren's talking about here. And I'm getting that sense from people where they're willing to look through this turmoil.
- [06:25]
Jack Forehand
Yeah. And we'll see how it plays out. Like, you know, part of me is concerned about like this buy the dip. Buy the dip working every single time. Like eventually when it doesn't work, it's going to be worse. But that's not a bearish thing. That's just me thinking through it. But yeah, who knows? I mean it's, it's just very interesting because every time you talk to a client they're like, why is this thing not down? Like they want to panic, they want to sell. It's like, why is this thing not down? And there's a lot of reasons for it, but I think it is the topic of the month, easily the topic of the month.
- [06:50]
Matt Zigler
The other part that we don't really get into in extreme detail here, but I think it bears mentioning is with this volatility with whatever else has been going on outside of private credit, we'll talk about some of that too. In Bondland, which the ability to rebalance like bonds have held up, diversification in the portfolios worked. If you weren't all mag seven or you weren't all like focused on certain corners of the market, this has been pretty resilient. Like the diversification case in the beginning of this year has been pretty strong and that's made it a lot more comfortable. Even in this short lived drawdown where people wanting to panic versus feeling like they need to. We didn't cross that line, at least in my client conversations that I've had.
- [07:35]
Jack Forehand
Yeah, no, I would agree. I think it's the same thing in mind. So we should probably get into the guests here because people have probably heard enough of us.
- [07:41]
Matt Zigler
So let's start with Ben, because what Ben talked about was we've had this supernova in private credit and in the strait of horror moves in the oil situation. And when he says supernova, he's not talking about the actual explosion of the star. What he's talking about is this thing happened in space. And the light, the information, the story hasn't gotten to us yet. So listen to the whole clip because I pushed him back. They do this model portfolio on Perseant Pro that they did something really interesting. So it's like negative, negative, negative, negative, terrified. All this bad stuff, not blowing it out of control. But then at the end, here's why I'm long and it's inside of the supernova definition. I think this is so cool. So here it is. Ben Hunt. Next up we've got Ben Hunt Epsilon theory. We're talking about some of the Persian Pro data. You basically said there's a supernova going on right now. Between the domestic credit freeze, the straight of Hormuz and the oil crunch. It's all this stuff that's backed up that it seems like we're all talking about it. Markets haven't really reacted. And you're telling me we're processing this information. Break down the lay of the land force, Ben?
- [08:49]
Ben Hunt
Well, I don't even know that we're really talking about it anymore. So what I, so what I mean by a supernova, I really mean there have been two supernovas. I mean there had been two gigantic explosions that have happened in the world, but they're a long way off. Or in the case of a domestic credit crunch for mid market US Companies, it's not this a long way off, but it's invisible to us because they don't, you know, you don't read about it in the Wall Street Journal. Kramer's not talking about, you know, a company that does $150 million of revenue, this private company and that funds itself through private, private credit lending. But that's all come to a halt. That's all just stopped. And that's what we mean by a credit crunch. And that, that's a big freaking deal. That's what I mean by one of the supernovas that's exploded. It's invisible to us and it just, it just takes time for the light to reach our eyes in ditto with what's happening in the Persian Gulf. We're looking through the events because we figure, well, it'll go back to normal. And honestly I think it kind of will. I think that's right. I think the massive conflagration, I feel like that really is kind of off the table. But the strait is still closed and I don't know of any outcome there that doesn't result in permanently higher prices and uncertainty around price for all the oil that comes out of there. And that has an impact. It's. I know it's having an impact in Asia and emerging markets today. It's like it just takes time. For that to spread the impact of that to spread to our eyes. And until it hits our eyes, we'll we return to our usually scheduled entertainment of, you know, let's talk about the Mag 7 or let's talk about, you know, a SpaceX IPO or like not. Not that those things are unimportant, but I really do feel like we've, you know, had these two big explosions happen. The light hasn't reached our eyes yet and so we think they haven't happened, but I think they have.
- [11:20]
Matt Zigler
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Kevin Muir
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- [12:22]
Matt Zigler
So fascinating insight of this is we saw the spike in private credit concerns. We've talked about that. We had a couple of headlines, Blue owl, blah blah blah. Yeah, but to your point, when those went away, that's specifically in credit. That's such a huge part of the lending function that got replaced in the system post gfc. That's where private credit came from. And yet we're not talking about, and I agree with this wholeheartedly, we're not talking about how your middle market company accesses credit which it is dependent on as a source of capital.
- [12:54]
Ben Hunt
Gotta have it, gotta have it. And so yeah, it used to be you would go to commercial banks for that loan after the gfc for a wide variety of reasons, both good and bad, commercial banks really stepped back from that market. You know, I'm not. And they stepped back from all of these corporate loan markets, including the big guys, the syndicated loan market. But into that opportunity came these alternative asset managers. The Apollos of the world, ares, Blue Owl, kkr and thank God they did right, they came in and they're making loans to these private companies, some public ones too, especially these private companies. That's where they need the capital getting a loan. That's, that's the oxygen by which companies grow, by which the engine keeps firing. And look, I have my concerns about what's happening in the private credit portfolios. Is it as bad as the GFC and residential mortgage backed securities? No, it's not. It's not as big in absolute numbers and it's not as levered. There's not as much borrowed money on top of it as in the gfc. But it's not a small number, right? If our threshold is, oh, it's got to be as big as the great financial crisis. Well no, it's big enough to be a real problem in and of itself. But there's an even bigger problem, which is that if these companies are now dead in the water and for all practical purposes they are. I mean I, you know, Apollo I think is still making some loans because they've got a captive insurance firm that can keep funding them to make new loans. But all of these companies, they're like sharks. Once you become an origination and securitization machine, once you become a machine that's in the business of flow, you gotta keep flowing, you gotta keep originating deals and funding them and securitizing them, man, that's just stopped, it's come to a halt. So my real concern, more so, and I have real concerns about the existing private credit portfolio. My even bigger concern is who's lending to a middle market, decent sized American company today. Because that's always been our engine of growth. That's where the hiring is, that's where the growth is. If they don't have access to credit, we're going to have a nasty recession. But because this is happening invisibly, not on the pages of the Wall Street Journal. You get hints of the Wall Street Journal. You had this company, Bedalia, where the sponsor basically had to turn over the keys to the creditors because the creditors are saying, no, we're not going to redo the debt, we're not going to roll the debt, we'll just take it, thank you very much. And so you just end up with zombie companies, companies that have no opportunity to grow because they don't have access to credit. That's my real concern right now. It's a supernova explosion that I think took place, but the light from it hasn't reached our eyes yet.
- [16:38]
Matt Zigler
Okay, same metaphor with straight of Hormuz,
- [16:40]
Ben Hunt
because
- [16:43]
Matt Zigler
carry that one through. So I understand the recession risk from. It's the tightening in credit that no one's seeing yet.
- [16:50]
Jack Forehand
It's there.
- [16:51]
Matt Zigler
If you're one of those companies, you see it, you feel it. Having conversations with people who are experiencing some of this. What about on the oil side? What do you see there? Post trade of hormones.
- [17:00]
Ben Hunt
Because we're now what for both credit and the price of oil. And people say, well, look, so if the price of oil goes to whatever 120 or something like that, 140 even. Oh, let's look at it on inflation adjusted return. You know, it's not as bad as it used to be again, Right? Correct. But our threshold for bad news doesn't have to be great financial crisis, it doesn't have to be 73 or 79. Oil crisis. Right. That's not. We don't have to get to that for it to be a real problem. So we're at the real problem stage because there is physically not as much oil going into the world. And when that happens, well, the users of that oil, they don't have it. You can either pay a lot more money to secure it or you just don't do your thing. And for a lot of them, they'll just stop doing their thing. Which means global growth goes down in the same way that a lack of credit means that US Growth goes down. It's just a winding down. That in this highly optimized world that we're in, because that's the other thing is there's no slack in our economic world today. We're all levered. Every country is levered up to the gills. Every company is levered up to the gills. Everything depends on growth. And if you have the whole machine just kind of. Then in a highly levered environment, that breaks things all over the place. That's what I feel has happened. But until you see things break, the market's not going to pay attention to it because it's the breaking that is the light hitting our eyes. I think it's happening. I think things are already breaking, but they're either under the radar screen or too far away geographically. It just takes time for the light to get here.
- [19:09]
Matt Zigler
One more thought because I know you're writing about this over on Persian Pro where you're tracking, there's a model portfolio. You're looking at some of this stuff. Any updates there? And just trying to stay in front of this developing story of global growth slowdown.
- [19:24]
Ben Hunt
Yeah. So coming into the month we were very net short, net short as I've been. And at the start of the month I covered all my shorts and went long because we are in a period once that systemic risk was taken off the table that just like happened in 2008. We had a 17% market rally in 2008 during April and May because until the defaults, until the lack of loan growth, until the breakage actually hits us, we're going to look through the, the daily news and so I'm, I'm waiting for that, the, the breakage to kind of appear to us, the light to hit us. Then I'll put the shorts back on. But until it does, you just want to go with the flow. You go with the narrative flow. So that's what I've been doing in the model portfolio.
- [20:25]
Matt Zigler
I needed people to hear that too. This is why you follow Ben, because despite that warning, listen to what he's actually doing with at least that model portfolio there. Ben, if people want to read more buggy on the Internet, where should we send them?
- [20:39]
Ben Hunt
Perseant is where you can go see a lot of it. But then I'm always available at Epsilon Theory on Twitter. Go to the Internet, the Interwebs, they'll take you to our new website. It's great. Epsilon Theory is the place to look.
- [20:54]
Matt Zigler
Thanks, Ben.
- [20:55]
Ben Hunt
Thank you, Matt.
- [20:56]
Jack Forehand
So next up is my conversation with Jim Paulson and Jim, Jim probably does some of the best charts out there, but it's also interesting because he's kind of seeing the two sides of this as well. Like Jim's done a lot of work around the idea that we're seeing cracks in the economy now. We're seeing maybe what's going on with the war having an impact. Inflation he's also seen coming down, but he's also seeing a bullishness in that weakness in the economy. So here's my conversation with Jim. Jim, welcome to Last Call.
- [21:23]
Jim Paulson
Thanks for having me.
- [21:24]
Jack Forehand
Well, we're really excited to have you and you have such a unique take on markets and it's a data driven take and that's why I want to talk to you today and for anybody who wants to see you put out all kinds of great charts all the time. Those can be found on paulsonperspectives.substack.com you've got a great substack. I saw 8,000 followers or something. So you're growing pretty rapidly here.
- [21:40]
Jim Paulson
It's getting there.
- [21:41]
Ben Hunt
I guess so.
- [21:43]
Jack Forehand
And part of that is because of how uniquely you look at the markets. And we're going to talk about inflation. You said a recent post on inflation and you don't see inflation as, as big a problem as maybe some do. But I want to start with our, our theme of the episode here, which is we've been talking about this idea that the market just seems to be immune to everything. I mean we, we continue to get news that would typically drive a market down, whether it's an oil shock, whether it's a war, and, and it seems like it's pretty resilient to this. And I'm just wondering if you have any thoughts as to why that might be happening.
- [22:10]
Jim Paulson
Well, the first thing, first thing I would say is there have been a couple really good gut checks here just in the last 12 months. You got to remember 12 months ago we had a 20% which almost was a bear market in the S P 500 in April of last year when they introduced the tariffs. And then we just got done here earlier this year with a 10% correction almost in the S&P 500. And of course worse moves in the broader markets. That's pretty, two pretty good gut checks for a 12 month period in any 12 month period. So maybe there's more downside that people realize, so to speak, they're kind of quick turnarounds, but they've been downside. But I would say the biggest reasons are just the attitude that has existed for the last several years, Jack. I mean we've got confidence on Main street at all time. Record lows in the post war period right now despite an ongoing bull market, despite an ongoing economic recovery. Main street says they've never seen it this bad out here. And because of that attitude, people are cautious people. If they think bad things are going to happen, guess what, they're not going to be overextended in the stock market, overextended on their financial balance sheet. You know, they're not going to buy their, their credit card, you know, swipe it too much. And as a result it's difficult to get a, a real vulnerability not only in the economy to bring it down even with a lot of bad things, but also in the stock market. People are sitting on loads of, of liquid balances. If you look at money market funds, disposable personal income, they're almost at record highs. Cash levels in the economy to GDP are close to some of the highest levels we've ever had. You know, you, it's a little less at the moment, but you've had players like Jamie Dimon telling you there's going to be a recession every week, you know, imminently. And so people, I think, I think caution, pessimism, conservativeness, you know, I think that's the kind of stuff that reduces the vulnerabilities to bad things that happen. And if you don't have vulnerabilities, it doesn't have to go down very far. I think that's. So we're going to get to a period, I think, where we're going to have an outbreak of animal spirits and optimistic attitudes, but I don't think we're there yet.
- [24:16]
Jack Forehand
Yeah, it's this idea. It's hard for bad things to happen when everybody thinks bad things are going to happen. We've kind of, despite the market being up, people still think bad things are going to happen.
- [24:23]
Jim Paulson
That's right. That's true.
- [24:26]
Jack Forehand
So I want to get to your inflation chart because it's really good. And you wrote a piece here on inflation and you don't think a lot of people are very worried about inflation, especially in light of the street of Hormuz still being closed. And some people were worried about it before that, but you don't see it as big of an issue as many people do. And, and I'll put up this chart 1 here, which is the annual inflation rate against the trailing four year average annualized US labor force growth. So can you talk about that chart and why you think it's important?
- [24:51]
Jim Paulson
I will. I, I think one of the most interesting aspects of this bull market would start in October of 2022 is we have had chronic primary worry about inflation almost from the get go, almost since the pandemic. So about five years in a row now, inflation was mission number one and growth and everything else is mission after that. And it's certainly the headliners, the Fed, but everyone's kind of been that way. And we've conflated the inflation situation of the pandemic and then worried about the tariff inflation and now worried about the war inflation with environment of the 1970s. And I think they couldn't be more different. Those two environments and the policy officials in post depression have built their entire policy approach on the inflation rate. I really think they have. That's kind of the, it's really the idea of, of too many, too many buyers chasing too few goods. And if that's the case, then whenever the inflation rate goes up, it's a signal to policy officials they must tighten to slow down aggregate demand to bring inflation. And if inflation starts to flag, they can ease again and focus more on growth. That's fine if demand drives inflation all the time. And in the 70s it did. The chart that you're showing basically overlays the annual rate of growth and a four year moving average of the labor force growth rate in the United States over the annual rate of inflation. And you can see that back in the 70s there was a really strong correlation. You had rapid labor force growth, you got higher inflation. Why? Because labor force growth is probably the best proxy for aggregate demand. If we create a ton of jobs and we got a lot of people that have jobs, there's going to be stronger demand. And we had an excess demand driven inflation problem in the 1970s that require appropriately massive tightening to get rid of, to shut down demand to bring it back in line with supply capabilities. That is not what we got today. We almost have the opposite of that. The pandemic inflation, worried about tariffs, inflation, the war, inflation are all temporary, number one, supply side restrictions that really have nothing to do with demand. Demand's whatever. But what we did was really restricts supply for a period. And when you do that, inflation goes up. But that's a different inflation signal because if you think about it, why when the inflation went up after the, during the pandemic, should we have tightened? All it's going to do is slow demand more and make inflation problem worse. And you're not going to correct the supply problem until the, the global pandemic goes away and supply comes back online. So now we got the same thing going on. If we raise, if we raise interest rates and tighten policy today, what are we going to do? We're not going to bring oil prices down. They're not going to come down until we get peace. So it's not going to help the inflation problem. But in the meantime we're going to kill aggregate demand even further. And so I think we're getting inappropriate policy signals going on today because we're misinterpreting inflation as excess demand when what it really is is temporary supply restriction. And the reason this is important, I think, is that we're going to, I think we're about to the end of this obsession with inflation because if we get peace, I think inflation is going
- [28:14]
Ben Hunt
to return very quickly.
- [28:15]
Jim Paulson
As you can see in that chart, there's simply not enough demand in this country to support that high of inflation rate on a sustained basis. Primarily because labor force growth is only half a percent a year on average. Used to be 3% in the 1970s. But if it, if we have peace and war is over, I think oil prices are going to come down because that's what put them up in the first place. But then we'll be left with the growth rate that we have in anchor demand, which I think's pretty weak. And I think what the reason long story short and all this is that the whole bull market we've been in the mission number one's been inflation all the time. I think maybe for the first time in this bull in the not too distant future we're going to switch our focus among investors and among more importantly policy officials. Mission number one may be growth and we'll get much more relaxed about a sustained inflation problem that could have a whole nother bow leg because they'll bring policy support in a manner we haven't had yet. And policy support probably helps the broader marketplace that haven't participated as much as technology. The Pasbit.
- [29:25]
Jack Forehand
Hey Mama, thanks for making all my favorite recipes.
- [29:28]
Kevin Muir
Hi Ma.
- [29:28]
Ben Hunt
Thanks for your unfiltered advice.
- [29:31]
Brent Kachuba
Hi Mom.
- [29:32]
Kevin Muir
Thanks for always being by the phone.
- [29:34]
Brent Kachuba
Hey Mom.
- [29:35]
Matt Zigler
Happy Mother's Day.
- [29:37]
Jack Forehand
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Matt Zigler
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Jack Forehand
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Matt Zigler
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Jack Forehand
Send your Mother's Day gifts at the UPS store and we'll get your gratitude there on time. Some follow the noise. Bloomberg follows the money. Whether it's the funds fueling AI or crypto's trillion dollar swings, there's a money side to every story. Get the money side of the story. Subscribe now@bloomberg.com yeah, and you talked about this in other episodes. Like we're seeing a lot of signs. It's interesting. We've had a bull market for a pretty long time, but we're seeing a lot of signs. You would only see us in a bull market. And that that's pretty positive from your perspective going forward, right?
- [30:25]
Jim Paulson
I think so. I think so. I mean if you just think about the policy potential we have left, you still got bond 10 years. You know that they're not two. There's a lot of room. You still got, you still got the real money supply at a little over 1%. Very, very modest. You still got the yield curve, which is relatively flat 50 basis points. You got the dollar which is extraordinarily high in real terms. That could be brought down a lot. So there's a lot of room to bring policy support. We just haven't utilized it because why? Because we've been so obsessed with inflation. But if that obsession goes away, I think we're going to bring some of that. And quite frankly I would argue that having a five year period in this country where the obsession of policy officials and everyone was we have to win against inflation every day you wake up, I think that's also just hurt and held back real growth, employment growth, Wall street or Main street sentiment and probably ultimately the American dream. If you think about it, we've kind of depressed all those for a long time and if we finally get away from that obsession maybe we can raise all those things I just mentioned and that could be another extend the period of this bull market and maybe we'll
- [31:42]
Jack Forehand
have people stop worrying about the stock market going down and recessions and inflation and maybe we'll all have some optimism
- [31:46]
Jim Paulson
out there a little bit for a while.
- [31:49]
Jack Forehand
Well Jim, thank you for doing this. I appreciate it.
- [31:51]
Jim Paulson
You bet Jack, thanks for having me so much. I appreciate it.
- [31:54]
Matt Zigler
So on one hand we have the bad stuff that's going on private credit, straight of Hormuz, everything that everybody knows is bad. On the other side we have the look through and you said it in the intro with Warren Pies chart and saying what the market's expecting then what Paulson's describing here which I think is just utterly fascinating for the optimism case. My favorite person to do the what's on the left hand, what's on the right hand weighing of this and he wrote two amazing posts over on macro tourist about this is Kevin Weir. That's who we got next. Here's my conversation with Kevin. So next up we're welcoming Kevin. We back to excess returns Kevin we macro tourist. Kevin, how's it going?
- [32:34]
Kevin Muir
Good man. How about yourself Matt?
- [32:36]
Matt Zigler
I am doing fantastic because you just keep throwing great emails my way and I'm like well that's another thing I have to get Kevin on to talk to him about. So in the great tradition of somebody please give me a one handed economist you did this thing with the bull case and the bear case and then where it lands. I was hoping you could walk us through that bull and bear argument as you see it right now.
- [32:59]
Kevin Muir
Yeah, because this war has definitely been tough to navigate. I don't know about you but I've experienced a lot of difficulties figuring out what's going on and the amount of traders that have just reached out to me and said like I have no clue, I don't understand. So in the kind of the hopes that by outlining it all it'll become more clear to me. I just kind of walk through the bull and bear arguments and it was actually very helpful because I realized I
- [33:27]
Matt Zigler
was probably a little too bearish.
- [33:31]
Kevin Muir
So let's, let's go and talk about this first of all in terms of, let's just think about what occurred from the moment the war started. We had this out of the blue event. Oil all of a sudden spiked. And I think the really surprising part about that whole episode was the fact that we saw the most pain at the front end of the yield curve which was very, very shocking for a lot of people, especially I would say the hedge fund community that if you look at the type of hedge funds that got hurt the worst, it was the, what's known as stir traders, short term interest rate traders and they were all just leaning too much on the camp that we were going to see lower front end rates across the board. So we had this situation where the war happens all of a sudden, oil spikes and instead of the Fed having three cuts priced in it, we had this move higher. One of the interesting things about it was the first couple weeks, if you remember back Matt, we had this situation where the stock market wasn't going down. Like I think in the first couple of weeks we might have been down 3% or something.
- [34:44]
Matt Zigler
It wasn't, it was a weird water tread moment of being like no, no, no, it's like jaw. It's just there J is there and what's going on.
- [34:51]
Kevin Muir
And we had this very like this pain within the market meaning violent moves where you see energy going bit straight up and then tech stocks going straight down. And a lot of the, the systematic community was just getting crushed or the quant community was getting hurt. And so what I think was happening in those first couple of weeks is that there was just general delivering across the board. So people were covering their shorts, they were covering their longs, they were pulling it in. And some of the trades that were really kind of exposed, for example gold, everyone was confused because we had this situation where gold fell immediately and I think that was just because everyone was long. So first couple of weeks we had just this general de grossing. Then we got to the FOMC and I don't think enough attention is placed on that FOMC meeting. And one of the things that occurred then, if we remember back going into that meeting, the previous meeting, we had had three dissents which were widely viewed as Waller, Bowman and Moran. And then we have this situation where rates all of a sudden are rising in terms of forward implied rates are no longer pricing in quite as many cuts. And then we have the FOMC meeting. And the real question was, is the Fed going to push back against that implicit tightening? And what happened was that the Fed didn't push back and accepted it. And most importantly was the two dissents disappeared and we only had one dissent. And what that was widely viewed was Bowman and Waller were okaying that implicit tightening. And especially Waller, I think the next day or two had a speech where it was very clear that he was saying, nope, that the cuts are off the, off the table. And, and if you look it accelerated into those final two weeks of March after the fomc. So we had a situation where the situation was getting worse in terms of oil was going higher. Not only that, the front end yield started to pick up, a lot of hedge funds were cut off guard. And then it was also made all the worse by the fact that we had the JP Morgan option wheel short put position all of a sudden started coming in and in terms of we were approaching that put position. Matt, the amount of bad takes I saw out there about this at the time just astounded me because so often we rally up into the call position where the market makers are long. So people were talking about, oh, we're gonna get pinned to the strike. And it's actually the opposite. When the market makers are short, that put it means that they're short gamma and they're selling more as it goes down, buying more as it going up, chasing it all around. And so it ended up being that those final two weeks were really just violent. And especially the last couple of days in terms of the month end were very violent. And then the position rolled. All of a sudden Trump brought back some of his rhetoric and the market stabilized. And to me that wasn't really unusual. I kind of expected that with the rolling of the option position. But the really strange part or the part that caught me off guard was the subsequent rally on the day when they said the ceasefire. And all you have to do is look at all the stats that never happened befores that are happening. There's just so many of them. Right. We've never had a situation where we're down 10% and then rallied within 10 days to new highs, things of that nature. And it was just kind of shocking to me. So I said, okay, let's really think about what's going on here. Why is this the case? So one, I think that we had a situation where the JP Morgan whale probably made it worse than it was, than it needed to be. Then we had some volume delevering, volume control funds and the CTAs made it worse. But I think at the end of the day, what's really driving this rally is that earnings continue to be great, right? And it's really that simple. And I always said if there was one chart that you said you could have one data series to predict where the stock market would be, it would be the next 12 month forecasted S and P earnings.
- [39:15]
Matt Zigler
You and Ed Yardini both, like, forever. Like, if all I need is one thing is tell me where people think earnings are going, and I'm gonna follow that until they change their mind, right?
- [39:25]
Kevin Muir
So we had this situation where everyone was cut short. Then all of a sudden, Trump starts whispering some words about peace. And we all of a sudden everyone looks around and says, okay, The S&P 500 used to be trading 22 and a half times. Next 12 month earnings is now 19, which is the level upon which we've bounced in the past. And a combination of different things. And next thing we know, we have this just rocketing bull market and it's just feeding upon itself. And I kind of thought to myself, okay, so, well, if I'm bearish, what's the bear argument? Right? Because there's the bull argument is that, oh, and by the way, at the end of the day, I was always one to say the geopolitics never matters, right? The Marco Poppich, you know, the reality is that the sign, the sound of cannons, you should be buying. I always ask folks that are really into geopolitics, I give them a chart of the S&P 500 and I say, if I take away the time on the bottom and say, point to me where the Ukraine war was, they can't. And point to me where this conflict is. There's almost no geopolitical event that you can see on the chart, right? But you can see where the economy rolled over or where the Fed cut rates or things of that nature. And too often people assign too importance on geopolitics. It seems very important. So I fell for it. I actually thought that this time might be different. I did the cardinal sin that investors should never do, because if you look at Marko Bovic's chart, his table, you'll see there was one time was different and it did matter, was the 1973 Yom Kippur War. But that's. So I fell for it. And I think a lot of folks might have fell for it. And so I think what the market's now doing is saying, okay, the war doesn't matter. The reality is that oil is not as big a deal as we think. And I'm actually very much in the camp that if you look at prices, let's just take gasoline prices and it seems like it's high, but then you discount them by inflation and look at them, we're 50th percentile in terms of, in real terms, right? Yeah, it's not as good as it used to be. But the reality is we've had lots of markets that have gone up and had oil rising a lot more than this. So the markets just looked around and said, hey, wait, look, we have a situation where the fiscal, the one big beautiful bill is kicking back all sorts of money. So there's a stimulus that way. The reality is that we've now priced out the Fed cuts. So the chances of the Fed going and raising rates is a lot different than them taking out cuts. And I, and that's something I've just highlighted this one thing to remove priced in cuts, it's quite another to price to, you know, actually hike in the face of this. And meanwhile we have this situation where, you know, earnings keep going up. And ironically, even though the United States started this war, they're actually a beneficiary in terms of, they're the ones most able to, to handle the energy situation. And we had a situation where that rest of the world trade, meaning that when people were selling us to buy the rest of the world on this idea that we had fiscal stimulus, the rest of the place and that we should invest in the rest of the world, it flipped back and they started to say, okay, let's go back to the US So it was just this mad scramble back into stocks. And especially the part that really caught me off guard was I didn't expect it to be the AI names like, that's like, it just, it just shocked me. And so, you know, I'm telling the story and it sounds like, okay, well there's nothing stopping this train, right? Like there's no reason to be bearish. And so I really had to check my inner gut and say, okay, what is the bearish story? And to me, the bearish story is, yes, earnings are going up to free cash flow. Completely different story. And it's, it's shocking how bad the free cash flow is. That's one side of the equation. And in terms of the employment, I look at this situation and I think about how precariously perched the employment situation is in terms of the amount of hiring going on. The fact that we have this threat from AI that's making people to put their hands in their pockets in terms of hiring people. And then I think about the oil situation. I'm like, that's just another reason for people to not hire. And it just increases the certainty all the more. And then another aspect of this war is that I look around and I say, okay, the world has become a much more dangerous place in terms of transporting goods. Globalization is going to be going even more in reverse than it has. What does that mean? That means the countries need to spend more on their own military. They need to bring money back. In fact, you could make the argument that this has increased that rest of world trade because the money to, to basically to fund all that infrastructure and military spending is going to have to come from somewhere and it's going to come from the world's largest savings, which is the US Stock market. But when you put all these things together, Matt, you realize that a lot of the bear cases is longer term in nature. It's not something that's happening today or tomorrow. And so it's just one of these situations where you get, in the meantime, stocks are running and it's just attracting more and more players. And it's going up because it's going up. And I'm sitting there saying that, yeah, what are all these bear things? And right now the market doesn't care. And it was just kind of illuminating to realize that my bear case is, is I think founded in, in real easy or sorry, solid analysis, but that the reality is that it doesn't matter today.
- [45:53]
Ben Hunt
The.
- [45:54]
Matt Zigler
It's in the other segment, which now I'm extremely excited for you to hear. Ben Hunt's framing of this is it's a supernova. We saw it. Like, we know it happened, but like the light hasn't gotten to us yet.
- [46:05]
Kevin Muir
Okay.
- [46:07]
Matt Zigler
So he was like, like private credit supernova, straight a hormuz supernova. It's happened. We just haven't gotten the light to the story. He's like, I can't tell you why nobody's talking about it. I can only tell you you should probably be long until people start talking about it. There's no way this is good. It just adds to the list of like, well, this is a major problem that will eventually come home to roost. And that was, that was one of the takeaways. Like, that's a very balanced view on where we are now and why we could continue to ignore these things. And unless stuff starts coming off the bear list.
- [46:35]
Jack Forehand
Right.
- [46:37]
Kevin Muir
I personally, like folks ask me, what do you think the catalyst is where do you know you're bearish. You have all these arguments. What is the event that changes the narrative? I still think it's employment that's going to be. When I see the first sustained uptick in unemployment, I'm going to lean harder on the short that that is going to be when I'm going to, when I'm going to do it.
- [47:11]
Matt Zigler
Kevin, we are. People want to bug you on the Internet. Where should we send them?
- [47:14]
Kevin Muir
They can go to themacrotourist.com or you can send me an email. Kevin themacrotource.com and I will be happy to send you some recent pieces.
- [47:22]
Matt Zigler
Thanks for joining us, Kevin.
- [47:23]
Kevin Muir
Thanks, Matt.
- [47:24]
Jack Forehand
And I would say to wrap it up, Matt, a great way to look at this is maybe what people are actually doing. And, and that's why I love talking to our friend Brent Kachuba is he sees what people are doing in options. You know, are they buying puts, are they buying calls, what's going on? And then also, how do those flows in, in terms of the dealer hedging associated with that? How are they impacting the market? So here's what Brent's seeing behind the scenes. Brent, welcome to Last Call.
- [47:46]
Brent Kachuba
Thank you. We're going to talk about my last call, which is thinking that this market is due for correction and then make the last call because, well, you're, you're
- [47:55]
Jack Forehand
not alone in that, friend, as it turns out. Like, that's been the theme of this entire episode. We've been talking to macro people, we've been talking to people all over the place. And I, and I like talking to you because you're just looking at the flows. You're seeing what's going on behind the scenes. You know, as much as you and I will have our macro take, which are very poor, that's not your focus. You're focused on the flows and you're focused on what you're seeing behind the scenes in the market.
- [48:14]
Brent Kachuba
Yeah.
- [48:15]
Jack Forehand
You know what?
- [48:15]
Brent Kachuba
And Jack, on that point, I've been doing some deep introspective introspection. Introspection. Sorry, I'm pronouncing that word wrong. I think I'm looking at myself and trying to separate what's happening in the flows versus this tail risk that seems to be lurking that the market just doesn't care about. And you know, as the stock market goes higher, you look, you know, or I look a little bit more silly in, in worrying about these risks. Right. And so it's a very, it's a very interesting cross section of what's in the flows, how people are positioned and then some of these macro signals which as a macro analyst I get rated a D or maybe an F. So I don't try to put that out
- [48:57]
Jack Forehand
there, but right there with you.
- [48:59]
Brent Kachuba
Yeah, but there's some relationships that matter and, and they, and they matter for a couple of interesting reasons. But, but we can get into that in a few minutes here.
- [49:07]
Jack Forehand
But it's interesting because it's not just you and the flow side. Like everybody seems to be thinking right now, why is this market not going down? I mean the macro people are looking at oil and they're looking at everything's going on with the war and it's like well this thing should be down more than it is and it's not. So I'm just interested to talk to you and see what you're actually seeing in terms of flows and maybe if that helps us at least to some degree explain what's going on.
- [49:28]
Brent Kachuba
Yeah, and you know, you look at a few of these things like if I was to tell you, you know, oil, oil is off a little bit today, the front month contract I believe rolls off. But there's no like a rhetoric change. Yesterday we had a real breakout in oil. It searched and the market just didn't care, which is fine. We had, I was talking to you about this before with the FOMC yesterday and, and so if you look at rates across the board, you know, they're higher. I was looking at this as the 30 year bond and, and you know, okay, maybe this doesn't matter all that much but we're talking GFC levels of highs in this because inflation's going up and the gas prices. But everybody knows that story and what, what overcomes that story is capex spend and what is weird in my mind to try to put all together and this is the macro conspiracy corner stuff that we are so famed for. There's tens of people that enjoy that you got energy demand from, from all this capex token spend which is, which is kind of interesting because energy costs are going up and then obviously with the capex there's also got to be some sort of, of value of money component and interest rates are going up as well. So, so that's kind of interesting juxtaposition but people know this story. But the dealer, the way that dealers are positioned are actually supportive of the market and people are very concerned right now about making sure they don't miss that tech right tail as opposed to being concerned about any kind of a left tail because you know suddenly the, the energy market kind of breaks the US economic engine.
- [51:07]
Jack Forehand
Can you explain that for people who aren't familiar with it, the idea is dealers are long gamma right now and that's going to suppress volatility to some degree. Is that right?
- [51:13]
Brent Kachuba
That's right. And if you look at the earnings, I mean there's no way to say it any other way. They've been blazing hot to make a 90s reference.
- [51:24]
Jack Forehand
Yeah, I saw like an 80 some odd percent beat rate like on earnings so far. So it's been like a solid earnings season.
- [51:30]
Brent Kachuba
Yeah and the semis in particular, intel, just Qualcomm, stx, Seagate, you know not a semi maybe in particular but those types of names, the stuff that is going into building out the servers for this AI LLM demand, you know that stuff is doing really well. And what's funny is the options prices keep getting more expensive as the earnings block continue but the names keep outpacing. You know Qualcomm Yesterday is up 18 and then if you look at the mag earnings like Google okay was up 6%. That was the implied movement. Amazon flat, Microsoft down, Medit down. So the big Mac sevens are spending a lot on Capex and okay Google did well but you know the reactions are a little more muted. It's the stuff that is you know, I guess downhill is what they're saying now from there the hardware, the picks and shovels maybe so to speak that are really, really doing very well. And so what you're looking at on the screen here is our compass. And what compass basically tells you if you traders are super into calls. And I got this fancy screen annotator. This is a new feature for those of you who are new.
- [52:36]
Matt Zigler
Oh wow.
- [52:36]
Jack Forehand
Yeah, we're not used to having the access to this.
- [52:39]
Brent Kachuba
Yeah. So if you look over here and this is from last night's close. So Meta Microsoft obviously reported, so did Cat. Cat had very good earnings over 6%. But what you see on this we call this dispersion. What does this mean? These plots are scattered all over the chart. A lot of them are also in the top right quadrant of this chart. That means that people are leaning heavily into calls in these names. If you are worried about the end of civilization you would see names on the bottom left. And then if we realize the end of civilization, maybe not civilization but you know, stuff actually hit the fan so to speak you would be top left. Top left is the bottoms of the markets right where it's down 20%. No one wants anything to do with stock. So right now what we have is dispersion and what that essentially means is that people are picking the winners. Now everybody wants to get into that next stock that's up 20% on one earnings report. On that point we have Sandisk reporting tonight and Apple. So that's what the focus is on. And anybody who has said anything about the macro conditions, the geopolitical conditions has really just largely looked foolish because of the fact that the stock market keeps marching higher and these earnings are good and you can't dispute that. And so there is this bid to tech and it's only tech. If you take tech out of the equation and you look at like equal weighted S and P or something, the market's very flat, right? So there is just this one story and that's fine because the gains are real, but we're really running on this Capex AI build out trade. And, and, and you know, that's the truth of it. Now Nomura put out a note and I think it was a very. Well, I mean Charlie McGill always says things very succinctly. The barbell trade, instead of 60, 40 long bonds, long stock is now 5050 long, long tech, long energy. So the energy trade is interesting because you want to get long energy because of the AI, build out the demand for energy there. And then also the Iranian situation where crude is obviously hitting all time highs. And what's cool about that idea, or I should say how that dovetails with this idea, is that if we look at the sector, this is a sector breakdown. So if you see green on this chart, particularly in this first row, what that is is put call volumes across a bunch of different sectors. Green means more calls than puts. So in this case we have, we have the volume ratio and the OI ratio. And so what you can see is that energy is getting a lot of bullish volume coming in and you're seeing call volumes versus the last 30 days are peaking. So you know that sector is really picking up in kind of demand. And then you know, you can see the tech here, right? There's a lot of just day trading volume that's kind of piling into that. And so what you end up with in this interesting situation is the market is very comfortable with the risk, as in low risk. And they're chasing calls in these tech names. They're trying to get in on the earnings plays, that kind of thing. But a lot of that is just short term people trying to like Chase, right? It's not necessarily the investing in options at this, at these Levels, it's more chasing the earnings in the short term.
- [55:49]
Jack Forehand
Energy is really interesting because energy is, it's like, it's a, it's a hedge and a long term play at the same time right now, which is really interesting. Like obviously if you wanted to hedge, some people are hedging like an overall equity portfolio with energy right now because obviously with the correlation with oil, although that's come down now, but if we do get another spike, that correlation will probably spike again. So energy works like from that perspective, but also it's like this long term AI play. So it's just an interesting, I mean obviously we'll all be wrong, probably an energy will go down or something. But it's just interesting to think it's working on like both fronts right now.
- [56:18]
Brent Kachuba
Yeah, and Jack, we've been doing this for a while now. We look at these correlation metrics a lot of times. And the way that you look at this core one out from the CBO is quite simple. If we are below this red line, that's sort of like the most bullish stance the markets ever had or can get, right? You're talking about people just literally frothing at the mouth by calls Jensen wearing his signing women's shirts and stuff. That's where you get peak bullishness. And this is an options indicator. So you're seeing that in basically call prices. So we're not quite at that incredible froth level yet. We're down at that, at that low. But then what happens is you get that macro risk off, right? More bombs start flying. Whatever would matter to this market, right? Where all of a sudden you go, I can't own stocks anymore. We dump stocks and then correlation, which you just mentioned, spikes. And the funny thing is here is like you can't go to bonds to hedge yourself anymore, right? So what is the hedge in the Iran situation? Well, it's energy because obviously oil prices would go up and maybe this is a permanent dynamic. And then at the same time all these new data centers can't get enough energy. So you also want to be long some forms of energy there. And granted there's a lot of different flavors of trying to invest in energy, but as a sector or an asset, that's kind of like the new way to hedge out everything that's happening. So you win in a bullish market and you win in a Iran, you know, escalation type, you know, scenario as well, in which case we would see correlation spike and ball get kind of crazy. I mean this was the start of the War. Right. And you saw that correlation spike. And now because of the fact that we've all been rushing in to the market on these tech earnings, we've seen this correlation metric come down, which is simply a signal that traders are buying single stock calls and they're selling S and P options. So that's a pairs trade, essentially is the way that would break out.
- [58:07]
Jack Forehand
And I guess we're at a point with Claude mythos where it's either the most bullish thing of all time for semiconductors or the end of the world. We'll just have to decide. I guess we just have to decide which one it is.
- [58:16]
Brent Kachuba
I mean, both are bullish because in that if the AI takes over the world, then if you're an investor in Claude or Anthropic, then you're probably pretty happy about that, right? Global domination.
- [58:29]
Kevin Muir
Yeah.
- [58:29]
Jack Forehand
And we'll have to come up with you. And I could do a great YouTube video like hedging the End of the World or something. It'll get a lot of views. I don't think there's actually a way to do that, but nonetheless, I could do an incredible thumbnail with you and some fire and stuff.
- [58:41]
Brent Kachuba
That's so funny. So I wanted to round this out with kind of an interesting chart here. And this is a brand new lens that we've put out before. And what you're looking at is a shade of blue across the market. And what we did here is we have a lot of great data that shows how market makers and dealers are positioned in options. And what this shows us is that market makers have positive gamma positions. What does that mean? So this is we're Raf here, right? We're on this day here. And when you look out in time. So what does that mean? This shows that market makers are on net, long options, long call and long puts.
- [59:14]
Jack Forehand
Now why does that matter?
- [59:15]
Brent Kachuba
Because the way they hedge this type of position suppresses market volatility. What does that mean? They sell rips and they buy dips. So if you were to look at the reaction this morning to Google dropping, you know, and then it bounced back up, right. Or Amazon was at a high, as soon as the market opened, it drops. Right. And then. And so you get kind of trapped in this, in this box. It's a weird thing because before I just said in the short term we have people chasing calls and options, but they're not necessarily trying to buy longer dated, positioned. And this is why I make that statement. Because if this map is all blue, it's telling you that on Net market makers are owning options in the single stock space which suppresses volatility. So if you're going to ask why doesn't the market seem to react much to this geopolitical situations? Well, this dealer positioning in the SPX single stocks suggests that they are going to support the market. And I think a lot of this is concentrated in these five names and I think a lot of this is systematic flows and unnecessarily investors thinking that Nvidia is going to be a great stock over the next five years. Right. It has more to do with I think pairs type correlation type trading. But needless to say that supports the market. There's also a positive game of position in the S P. So the market making options community is there to simply hold the market relatively into place. Then we get this positive drift because obviously some of these semis are crushing it and that is adding a lot to the improvement of the S and P index prices. So this actually is not conducive to the market just falling apart. And I think this is one reason that we have not seen sort of the sum of all fears the realizing of downside in an environment where the Iran situation seems to not be improving.
- [61:03]
Jack Forehand
Well, it'll be interesting to see how this plays out and for people who are more interested in this stuff, I think in two weeks we've got options expiration and you and I in about a week or so we'll be recording a full episode on this. So Brent will have a lot more stuff from behind the scenes on that at that time. Brent, thank you so much. Appreciate you doing this.
- [61:17]
Brent Kachuba
Thanks Sharon.
- [61:20]
Jack Forehand
So as we do our look forward segment, Matt, what I really want to talk about was earnings because I think it's really interesting what's going on with earnings right now. I mean earnings have been pretty consistently beating. We've got like 15% year over year earnings growth. But behind the scenes, you know we've talked to a lot of our guests about this recently. There's a really interesting story playing out in terms of the mag 7 versus everyone else.
- [61:41]
Matt Zigler
So where do you come down on this? And I think this is, this is so interesting because between Cameron Dawson dropping that bomb on us and Clickbait the other week with it's all, all the earnings growth is attributable to two companies and the brands of mid myth and all this, all this stuff, it feels like there is some improvement in earnings. We're seeing that at least in a general level. It's the weighting and the attribution that I find troubling and unsettling. Yeah.
- [62:09]
Jack Forehand
So I think first I'll just read from this FactSet scorecard. So for Q1 2026, 84% of S&P 500 companies have been reporting a positive EPS surprise and 81% a positive revenue surprise. So going back to what I said before, we've got pretty positive news. But what's really interesting is this, you can use this behind the scenes data in so many different ways. First of all, I think it's true that you are seeing relative to the Mag 7, you are seeing other companies catch up the four 93 smaller companies, however you want to look at it. But what was really interesting from that thing with Cameron is this idea that you have to look in the data and it's like you've got the narrow mag seven, you've got the 493, but then you've also got this narrowness inside the 493 which is, I think she said like 50% of the earnings growth is being driven by like two companies. So on one case you want to be like, oh, earnings are broadening, you know, look at these materials companies and all these great companies that are, you know, having great earnings growth. And on the other side it's like it's two tech companies that are, that are driving a lot of the earnings of the 493.
- [63:03]
Matt Zigler
And raising the question inside of Kevin's piece, he got into some more detail about this in the written piece on Macro Tourist. But this idea that you're seeing, sure earnings look good but free cash flow doesn't look as good. And as you start to get into the attribution, as you start to break down that stuff you start to go, it's not so easy to make a very bullish argument out of this. Like we would normally look through in earnings expansions which are, hey, this is part of what we're always looking for in recovery. If we had just gone through a 20% drawdown and we saw this earnings growth on the other side, we'd be super, super excited because we'd be assume other stuff is catching on and catching in to this breadth. But what we have here is this question, is this breadth actually a mirage? And when I see the free cash flow data, when I see some of the, what gives me hope is that, what did you say it was? 84% of numbers are reporting positive earnings.
- [63:57]
Jack Forehand
Yes, but I remember it's always like, it's always well above 50, like companies always beat. So I think it's a little Bit above average, but it's. Yeah, it's been solid so far.
- [64:06]
Matt Zigler
Yeah. So the question is, are we going to actually see that maintain and hold over the next quarter or two of earnings and are we going to see those expectations continue to tread water? Because if so, more companies will join the good, the good news and they'll figure stuff out because the economy's not deteriorating. If this is deteriorating, though, like, we probably Wiley Coyote off the cliff.
- [64:27]
Jack Forehand
Yeah. And it's interesting because the Mag 7, one of the things we have to keep in mind is the biggest companies in the world are spending massive amounts of money for the future right now. So that plays into the free cash flow thing you were talking about before. Their free cash flow is way down. They're going to show worse results relative to everyone else right now as they're building this out and that the huge question is, will it pay off? And you know, we've talked to a million guests in a million directions and I don't know that anybody knows right now, but that's the question. I mean, if these bets work, you're going to probably see the Mag seven, you know, three, four years from now take, take over again. If they don't, if the money flows down and you know, we see like we have in other technological revolutions where a lot of the growth comes from the average company and not necessarily from the builders, you're going to see a different outcome. I think that is the big question right now.
- [65:09]
Matt Zigler
It's the biggest question I can think of. And let's not forget that money is getting spent back into other companies. So when the big companies place the order, it's with a smaller company many times in the index, hopefully not in some confusing flowchart of like, like, for like vendor payments and problems. But it's this money gets spent back in just like us, just like me and you as consumers with our jet fuel. Like, this money gets recirculated. One company's expense is another company's revenue. And yeah, if this is right, this is lifting everything higher. If this is wrong or rotten in some places, we're going to figure out what the source of that is. It's going to be a headache for a while and we're just. Nobody knows.
- [65:49]
Jack Forehand
Yeah, that idea you talked about, we talked with Tom Hancock of GMO about this idea, which is like the money flows down. I mean, Obviously what the MAG7 is spending is the earnings of other people right now. And that is driving, that's going to drive earnings growth in other companies. There's this story about, you know, for instance, the two chip companies driving a lot of the 493. That would be a very different story if the Mag 7 were spending a ton of money. So it all, it all flows together like. Yeah. The Mag 7 earnings coming down. Yes. Is that driving earnings growth in other companies? Yes. And so. And then will it eventually flow down to your average company out there? I remember like when, when you talk with Dave nodding on clip Beta, he had said he's been talking to a lot of small businesses and they're seeing huge benefits from this. So like will this flow down? I think is the question right now.
- [66:30]
Matt Zigler
It's a magical kind of trickle down earnings economics. I don't know where the tortured metaphor is inside of that, but it, but it's real. And just like we talked about this with David Rosenberg too about the spending of savings, I think Cameron Dawson mentioned it as well. It's like the consumer spending down their savings so we have less net savings on the average household's balance sheet. Well, these big companies that built up these fortress balance sheets like this is also the money that's getting spent. We have the largest companies in the world with the largest cash hoards that aren't needing to borrow to do some of this build out and expense in the same way that they used to. And that benefit is flowing down through the system. I don't think we've ever seen anything on this size and scale in US Markets.
- [67:12]
Jack Forehand
No. And to your point, it's much more solid because a lot of it is coming out of cash flow. And so when we look at fiber and we look at all that stuff, we have to understand that this is differentiated from that perspective. There was way, way more debt being used back then. And so none of us necessarily know how this is going to play out, but it definitely means this has more staying power because of that, because this is coming from like legitimate cash flows, a lot of it. And we're seeing some more debt mixed in now. But the beginning and a lot, a huge portion of it are coming from cash flow.
- [67:38]
Matt Zigler
So in the fiber boom, how much of the forehand fortune was made on the fiber boom?
- [67:43]
Jack Forehand
There wasn't much of a forehand was getting out of college at that point. So the fortune was. I'd invested in a garbage company and lost all my money at that point because I was like trying to learn. I got a tip from my uncle's stockbroker or something. So the forehand fortune was basically barely getting by at that point.
- [67:58]
Matt Zigler
Well, you know, you gotta build it somewhere. I mean, the.
- [68:00]
Jack Forehand
Well, in a lot of ways, I actually was aligned with the Fiverr boom because I also lost all my money at the same time that the Fiverr companies lost all their money.
- [68:06]
Matt Zigler
So you figured out your own way to lose all your money without a maybe.
- [68:10]
Jack Forehand
The cautionary tale for future tech booms is what what went through, what Jack Forehead went through in the late 90s.
- [68:14]
Matt Zigler
Hey, listen, when they were talking about the fiber boom, I was still laughing about the colon blow sketch on SNL and had not caught up to this level of sophist. Know I'm sympathetic. Anything else?
- [68:27]
Jack Forehand
I guess that's probably a great note for you and I to wrap up on, given the topics we usually talk about. So you want to bring us home, Matt?
- [68:32]
Matt Zigler
I'm going to bring us home. Special thanks to Ben, Jim, Kevin and Brent. That was awesome. We love doing these shows, especially these, these market. These market recap shows at the end of the month. So if you like this as a format where we bring back guests in for these clips, please let us know down below or experimenting with a bunch of formats. YouTube and the algorithms and Spotify and everything. They're weird, you know, they're weird. Try to support us, help us grow. Tell a friend, tell an enemy, tell a loved one, tell a hated one, Tell your local congressperson. Whatever you can do, like comment. Subscribe all the things below. This is Excess Returns. Find us on substack2. And we're out.
- [69:10]
Jack Forehand
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be
- [69:35]
Matt Zigler
holdings of the firms of the hosts or their clients.