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- [00:00]
A
Ben, we gotta start with this Iran peace deal here, okay? Asset prices are already flying on the news. My sense is that we could be overreacting to the good news here. How are you looking at this?
- [00:12]
B
It may be an overreaction, Phil, but I think it's more about that now. We're really normalizing the Strait of Hormuz and all the flow from oil and other commodities, which was a real issue. Right. That's really created such a tense bottleneck and somewhat rippled across the globe that we got that fixed just in time. I think it was a few more weeks from here that there would be significant shortages globally. And you could tell from the action overnight in Asia, all the Asian markets rallied more substantially than ours because that's where the real shortages would have shown up. So I think it's a true relief rally. It could have more lags. But I do think that on Friday is kind of a climax. We get the tax, we know what it's about, they're going to go back into negotiation. So we're priced in a full reopening of the Strait of Hormuz. And then that means probably somewhat lower energy prices, lower inflation, maybe less of monetary policy tightening out there. But most of all that Asia itself gets a relief from. And I think that kind of carries the rest of the globe.
- [01:13]
A
How has the potential peace deal, let's say, let's assume it holds. Right. How does that change your base case for the rest of the year for asset prices?
- [01:22]
B
Well, this bullish. I was actually bullish itself because as we talked, like, you know, this conflict was another sort of like V shape opportunity for markets, which turned out to be the case. Just like Liberation Day last year. It was difficult to navigate initially because of the noise and because the very unpredictable character of both Iran and Israel, which to some extent still is. But I think for the remainder of the year, and as this relatively holds a ceasefire with some skirmish around it, you can really see that this actually opens up the global economy for more recovery and the US Economy. Now, if you think of gas prices here, which is, I think, the big trigger for our economy, I calculated this morning that we probably could have a dollar lower in gas prices over the next couple of months, which really ignites consumer spending here into the fall. So I think it's a. It's a bullish case.
- [02:16]
A
If I had to force you to make the bear case, where would you start?
- [02:20]
B
Here you would start still with the Fed itself, because they've been signaling, like looking at this conflict, it caused all this inflation we're already dealing with high inflation from the last five years. We have expectations that inflation may go higher. There's a group of people in the Fed that are worried about that and that message will probably be still strong out there. If you were to take a bad case in it would be this Fed actually not going to any kind of rate cut scenario anymore because of lower energy in the future, but it would actually stick with this rate hike scenario. I think if they do, then I think it could put some pressure potential in the markets at some point. Because Kevin Wash coming in as a new chair, he can't really sway the FOMC his own direction. He would have to go along with the remainder of the FOMC and say, okay, this is probably an inflation problem that we do have to tackle and we have to have tighter policy.
- [03:16]
A
You don't think Warsh would say, hey, look, it's time to cut rates just because that's sort of his imperative as the new Fed chair.
- [03:26]
B
Yeah, that's, that's how it's positioned, but it's not necessarily as imperative. In fact, I think he is more hawkish than people may realize based on his history, but also based on some of the interviews that he had prior to coming in as chair. He's big on getting the balance sheets a lot smaller. That balance sheet is actually a lot of liquidity in the financial system, so you essentially drain the liquidity. And we know that that balance sheet and the s and P500 had this anecdotal relationship for a while. Balance sheet expands, S and P goes up. That psychology is much in the markets too. So him being focused on that balance sheet, I think is somewhat of a more hawkish stance than though it's currently priced in.
- [04:08]
A
Can you explain the difference in how, let's say interest rate cuts versus hikes versus adjustments on the balance sheet, how that affects asset prices typically? Because I think that is often confused on what each side of that does.
- [04:23]
B
Yeah, that's true, because a standard interest rate cut means that you're getting interest rates lower across the board. In the financial system, where it shows up first is in mortgage rates. It. It tends to affect that sector first. So the housing market gets a bit of a boost. But when you think of this balance sheet, which is an accounting entity, you actually really think about the Fed owns Treasuries and mortgages, and it let that portfolio shrink, let it roll off. But on the other side of that, you have what they call bank reserves, which is basically money in the system. I call it High power money because those reserves can be converted into a loan in instantly and that loan is credit to the economy. So if you drain the reserves because you're bringing the portfolio, you're making the portfolio on the asset side smaller, then that in itself could push up interest rates to an extent, particularly more longer term rates. Now one reason why that is is that the Fed though owns almost 40% of outstanding 10 year, 30 year treasury bonds. So there's still a big, let's say foot there in the market that if you take that foot off, you take it out, then those treasury yields may go up a little bit because there's not that demand factor from the Fed playing there. Technically I think that's sort of mechanics, whereas as I mentioned on the other side of it is the bank reserves that are about 3 trillion or more still in the system. That has always been a cushion to the banking system, as in this is the safest asset in the system and that has to be replaced. I think what happens there too is that banks will probably buy more short term Treasuries as an alternative to these bank reserves, say T bills or two year notes and that may bring those rates down, but there will be less buying of those 10 and 30 year bonds because the Fed has such a big market share in that part of the curve. And I think we could see a bit of a steepening of the yield curve over time and I think it's good for the banks because they make money off that. But it also is a reflection of that. This is we're going to go into a bit of a new phase with Fed policy that we weren't used to for the last decade, decade and a half.
- [06:35]
A
And the new phase meaning what? They're going to be not using interest rates necessarily to adjust financial conditions.
- [06:44]
B
Yeah, that could be one way that they keep interest rates where they are or lower them somewhat but not more, but then use this balance sheet to sort of manage the rest. And we've been very used to having the Fed really in the markets. And that's what Boris wants to change. He wants to take the Fed out of the markets. He wants to take the Fed out of the fiscal game, also called game as in the Fed expands the balance sheet though, it buys treasury bonds so it finances the deficit. That matters too by the way. Right, because the deficit is very large and believe it or not, our government spends a lot of money which drives a lot of our economy. So that's a big change. Now it won't go immediately cold turkey, it will be for a longer period of time that this unfolds. But that's also where probably the pain pressure comes in in the future. We've been very accustomed to a Fed being very accommodative since the financial crisis. Always run that balance sheet as a support to the economy, support to the markets. And he looks to change that wash. And I think it's going to be a tough stretch in a long haul for that to complete, but he is very destined to do it. I think that matters to markets eventually, quite significantly, especially if we're getting the new stress moments in markets.
- [08:00]
A
So this is bearish for stocks, if I'm getting this correctly. Right.
- [08:05]
B
It could be bearish for stocks in terms of momentum and cyclical movements, but it's not bearish. If you think of what's happening currently today with AI and semis and chips and memory stocks and investments are happening that's really driven by that reason. There's investment coming in from foreign countries, there's investment happening in the data centers, and it's all funded with bonds and all that. That's all a different part of that, separate from what the Fed is doing, but what the Fed has always supported, which is essentially the s and P500, a broader market. And you know, there could be, at least initially, some pressure on markets. If the Fed becomes apparent that the Fed continues to drain more and more of the liquidity out of the system, that liquidity has to be replaced with our liquidity. Now, there's a lot of liquidity out there, but it may not necessarily happen or so easily. At least think of money markets as an example.
- [08:58]
A
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- [10:29]
B
I think that's right. Like it takes a, it will take several months to get the straight straighten out to normalize the flow of energy. And there's also a bit of a, because you have so many ships sitting there, the count is something like, well, we talk actually about a total of 600 vessels, but there's about 150 to 250 that are close to the strait that are mostly with energy. You know, they have mostly crude oil, but there's also fertilizer and there's helium, there's aluminum. The fertilizer is the inflation issue really, in my view, that has been good. 30% of fertilizer supply flows through the strait and its estimations, that may take several months still before that gets normalized. Now, we can tell already if you walk out here that the menu prices have been rising because of the shortage of fertilizer. That is a direct cost input to producing food here. So part of our inflation problem is really that we have elevated food inflation and with that comes services inflation and with that comes transportation, that sort of thing. So gas prices, energy may go down and maybe somewhat of a leaf on the headline number, but when you think of services, that's more core related. It may not. So I think inflation will stay higher. But I do think that the markets were right. We were pricing in about a four and a quarter headline. Inflation is to peak, which is in the interest rate. Markets were priced in that way. I think that's right. That's probably the case. But then the movement down from four and a quarter to say three or two, that will take a longer time. I don't think we'll see 3% headline, maybe not until next year.
- [12:07]
A
Wow. So if we combine, let's say the new Fed regime, a little more old school, let's say, and we have sustained high inflation, all of that, and yet markets are going up tremendously. And a lot of this, almost everything is the AI Trade. It's the new macro. It is the whole theme, the whole market. You have a group of stocks you're watching called the Parabolic 7 instead of the Mag 7. Tell me about that.
- [12:38]
B
Yeah, it came so spontaneous in my mind when I started looking at what really looked like mathematically parabolic move up. Micron is the most vivid example, but Marvell is too. And it became ultimately also IBM and it came even Intel. So I started looking at like, hey, this is a new group that's forming that all showed this really spike up in stock price. This has probably much to do with that. People are recognizing that these companies are taking a more lead in the AI race than the Max 7 at this point. And I think that switch is now really actually unfolding from the leaderboard switch. That why let's say Meta and Microsoft, partly from disruption reasons when AI have been really lagging. But even Apple and say in Amazon or Nvidia for that matter, have lagged those parabolics adapt them. Parabolic sevens. Now if you look at today, these moves just continue. We pull back from the highs recently, just about a week and a half ago, pretty sharply like Micron was, I think off the high, almost 30%, but it pops right back up. I think that's a parabolic behavior. Is it good? Probably not, right? Because it seems to be stretching really into the atmosphere with obviously technical analysis. If you overlay that, then you get very extreme overbought readings. But the market seems to be trading that this is the new group of companies that's going to drive this AI trade, this AI investment team forward. And therefore I think he's going to see that group outperform the max 7 for some time.
- [14:22]
A
So do you think it's too late to buy into names like Micron or Intel, even something like Dell? These have all had incredible runs. Did investors miss it if they're not already in?
- [14:34]
B
Not entirely. I think partly because if you really look at the investment boom that's happening, which just really got started there because we have about a couple hundred billion or so that's come in so far. The lineup of investments from Qatar, from uae, from Japan, from other places. Actually take Japan as a really good example, they've now committed to 500 billion for this year. So it's huge, right? If you think of 500 billion, I'll give you this statistic like from 2021 to into 24, we had the Chips act, inflation reduction act and the Infrastructure act under the previous administration was 300 billion of investment largely spent, drove our economy from 2% to 3% and we stayed at 3%. These investments under the new administration from Trump, this 500 billion from Japan, there's trillions behind it. It's going to drive our economy to probably more like 6%, something like that for a period of time. That's all this investment is driving it. If these companies have to lead in this process, then these levels are actually quote unquote cheap. And if you think of the valuation as you can tell as Micron is that example, that multiple is really low because your growth expectations are so enormous. But they may not be unrealistic because investment really is driving earnings growth. If that doesn't stop because of the volume that's coming in. Yeah, then those, those, those stocks are actually cheap relative to even in Nvidia who trades say quote unquote cheap too. On forward multiple as often said investors should buy these stocks. It's not too late.
- [16:15]
A
If you've owned these stocks for more than a year, you've made tons of returns, your capital has appreciated dramatically. How would you know when it's time to get out of these stocks? Because you know a lot of people are already taking profits. Got a lot of friends saying look, I was in Micron but I made 700% so I'm done, I'm good. How do you know when it's time to sell?
- [16:40]
B
Well, those numbers are obviously for portfolio. If you think of portfolio management now, right, as risk management, if one position is up 700%, his weight in the portfolio is likely significantly higher than from the time you purchased it. And that you have to manage. You gotta trim that weight down and take some profit on that position because otherwise you're getting an over concentrated position in one stock. And that's what I call the portfolio burn. One stock can really literally burn your portfolio down if it goes down hard. And Micron recently showed that like it went to almost dollars per share and pull back pretty sharply to about 800 I believe. That's a lot, right? That's like a big move. So you do have to accept higher volatility in these positions and trim it at least if you have sitting on gains like 700 now percent now the subsequent thought there is like how do you diversify this? Or what do you do then? So you know there's some more in that universe that you can think of. We can also think of by the way that the SpaceX now is launches IPO. There's other stocks that are related to that. You can think of that universe, space stocks. You can Think of robotics, right. There's another area of this that linked to that. So there's other ways to diversify around it. Plus there's still value in the max 7. Right. So you could think of that too. But you must trim your position if you're up 700% on one stock position.
- [18:06]
A
So let me push you on this. The Mag 7. You're still bullish on it. Sounds like I have a lot of colleagues and investors I speak with that have rotated out of the Mag 7 over the last six or seven months or so because in many ways they see it, they've had their run and now it's time for this next leg of the AI market to carry things. But you still like the Mag 7.
- [18:32]
B
I think there's some good defensive plays there to do. I mean, if you rethink of it like Microsoft actually to me, as much as it gets some disruption from AI, it's such an incredible company in terms of free cash flow. And it's one of the better ones actually in that space. Of course, Nvidia has still the very much dominance in its chip space. There's some competition coming in there now, but that's what they've accounted for. And then finally it's Apple that is such a incredible brand. It's very hard to see that company falter so much. And it's working hard on trying to catch up in the air race too. And it's going to happen, right? We're going to have iPhones with so much more AI capabilities which already is happening, but will be more. I do think these companies will be able to stay in the race, which they're just behind on the examples we just talked about really because they're getting the investment the Max 7 is spending, but the Dell and other kinds of companies are more getting investment and boost because of the memory and everything else that's happening with this company.
- [19:41]
A
What about Google?
- [19:43]
B
Yeah, that's another example of where they leaped ahead with their large language model. Ahead of. I think it was not only Microsoft, but it was even anthropic. So they kind of still in that race there of the best large language model. I think if I think of the 90s when I started working, Microsoft became the ultimate software provider and was rolled out in every corporation. I think the large language models, that same idea today. Whomever will have the best model, whether It's Entropic or OpenAI or Google, that winner will get that large language model will be rolled out everywhere. And if you saw the news today from that, the Administration is looking to limit Anthropic's large language model to be export leads. You know, this also sets in motion, you know, sort of the regulation sets in motion will be the true winner. Google is very much up there, so it's another name to keep a good eye on.
- [20:41]
A
You know, I've seen a lot of people speculate that the end game of these frontier AI labs will be government stakes because there's no way the US Government doesn't get itself involved if the technology is really that good. There are safety issues, policy issues, regulatory things that the government just can't allow to run on its own effectively. Okay, so I know that if we move out of the Mag 7, what are you most bullish on right now in the market?
- [21:13]
B
Well, I do like a lot of financial stocks we talked about, the investment banks are now in a really good position to carry this cycle of the capital markets and IPOs that was kind of dead last year. People thought that 2025 was going to be the IPO year. It's become 2026 and it feeds on itself. But once one IPO goes well, on Friday was a really good example of how the book runners at Goldman and Morgan Stanley and those guys are experts at that, but really did a nice job that sets in motion a confidence cycle. Like people feel this market is open, it's willing to absorb mega cap IPOs. So therefore you can also have smaller IPOs. Of course not everyone will be super successful, but that does matter to their revenues. They're getting more deals. And eventually as the IPO market sort of becomes hotter, which I think will happen in 2027, you also get the M and a cycle coming back that's currently a little debt and it comes back. And then behind that you get private equity, which has also not been performing well. So I also look at that sector too, like a lot of these related type companies that are say business development companies or private equity kind of companies, they've obviously underperformed significantly because of private credit fears, but some of it is unfounded, I think. So if you think the investment bank Goldman, Morgan Stanley, but actually also think of names like an Apollo or kkr, there could potentially be value opportunities here because of the IPO cycle really turning on now. So it can really infuse the capital markets in a good way, that I think there's value in these banks and in those BDCs.
- [22:53]
A
Do you have a favorite in the financial sector, like a favorite specific stock?
- [22:58]
B
The top has always been for me, Goldman that they have it together I mean that bank has always been able to manage itself when the cycle turns and it's like they just got really good people there and, and they're risk takers. Right. So Goldman, if you talk about balance sheet that we talked earlier from the Fed, Goldman is all about warehousing its balance sheet to different companies which means basically they're willing to take significant risk where they see the opportunity and they are able to manage that risk, to warehouse the risk and able to make money off that risk. And that's unique. I don't think any other investment bank can top that. Morgan Stanley to an extent. But all the other ones, Citi and all the other ones to left, not really.
- [23:47]
A
Okay, so financial sector, Goldman Sachs, what else do you like in the market?
- [23:53]
B
Well I mean I want to mention the one related is obviously the value player Citigroup that has been in an L shape sort of stock performance for years. It was obviously way overblown during the financial crisis, went through a lot of restructuring efforts. It's been really looked at like this is the consumer bank is back to life and Citigroup is the one position there better than bank of America. So I like that one too. It's often mentioned but it's a really good value play. Other ideas really are more in the industrial space. Right. Because I thought about like GE as an example. The industrial sector has been really infused by the administration turning the policy towards domestic production and, and that's really driving companies like ge. But GE is also involved in aerospace. So you think a little bit of link towards SpaceX which I want to mention by the way not a company related to that would be companies like Lockheed Martin or Raytheon which are also companies that are going to be very much in the forefront of the space race because they're government backed companies. Right. It's kind of to extend SpaceX too. Getting more government investment to drive this, you know, more build out in space. And then finally I think if you think of one company is not listed yet to my knowledge is Enduril, which is this company that is has government contracts to basically develop these unmanned fighter jets. Right. And it's something to watch.
- [25:30]
A
Yeah, those are pretty good calls. And all those stocks you're a long term holder in.
- [25:36]
B
I'm a long term holder or I have clients who are involved in this.
- [25:41]
A
Yeah, got it. So if we zoom out a little bit, we're moving closer to midterm elections. Typically midterm years are the worst of the four year cycle for the stock market. Are you looking at anything or are you concerned about anything in the political calendar from an investment standpoint?
- [26:02]
B
So can I maybe talk a little bit about the prediction markets and large language models that try to predict what the outcome will be in November? It's obviously really key election because of what's happened this year, a lot of unhappiness about the war. There's a lot of tension politically also within both parties. So how it will play out is that so far the prediction markets think there's a possibility that it could be what they call blue sweep, meaning both the House and the Senate become Democratic majority. And there's something to worry about that a lot of things that we're seeing playing out currently of this very favorable environment as regulation for the banks, like deregulation or the investments from foreign companies and countries that that could change. I don't believe that will be so dramatic. But the fact if we were to go to a blue Congress, so to speak, it will trigger in the market a bit of attention because it's a very different approach to the economy, meaning more government spending again, more socialist spending perhaps, or related, maybe more in healthcare, things like that. Maybe healthcare is an opportunity for that if that were to happen. But I think. And you see of course the resistance to economic Elon Musk becoming a trillionaire, you see all the political resistance there. The markets react sensitive to that. So we'll see how it plays out. The prediction markets are becoming better and better predicting the ultimate outcome. So do large language models and can calculate probabilities. And yes, it does point into political change. Right now we're in a very nice phase here because of the end of the conflicts. So the markets are not yet worried about it, but. But I do think by August, September, this really comes into the mind of investors and we're going to have to think about it how to potentially diversify again. If the environment, political environment has changed.
- [27:57]
A
Would you be de risking out of the AI trade ahead of the midterm elections?
- [28:02]
B
Not entirely, because I don't think that the political change would be such that they would stop all those investments. But what I do think could happen is that there will be a lot of talk about wealth taxes. There will be a lot of talk about other sort of spending measures that that will affect potentially market sentiment. And as a result, yeah, the more cyclical stocks will be very sensitive to any change, just like different. But there was a speculation the Fed may start raising rates later this year. That may change now because of the energy prices declining. But when that happens. Yeah, ultimately the very sensitive hyper stocks reacted to that. So I think of the same sort of thinking, like if you position in these parabolic type stocks, you do need to take profit. If you believe that there's going to be a more significant political change in November.
- [28:52]
A
That makes sense. You would still be holding, let's say Goldman, Citi, the defense names. You still like all those even if we got a blue sweep?
- [29:00]
B
Yeah, I do. Because I think that the deregulation of banks itself is already so much put in motion they can't just roll that immediately back. I also think that by the way, some of the max 7 or parabolic 7 these types of companies will perform just because of investment ongoing. I think it's more that maybe people make more an assessment about what will this do to our economy. Are we maybe not going to grow at 6% but shift down again to slower economy? That would be the case that then small caps as an example, that's sensitive to that they would underperform.
- [29:34]
A
Okay. I think that's. That's a very steady call, I would say. Ben, where can people find your work online?
- [29:43]
B
A few places, but I start with my substack, like a lot of us have that. So I run this company called FatWatch Advisors. I made a substack called FatWatch Notes. I write them every day on my list too.
- [29:55]
A
I read them every day.
- [29:56]
B
Thanks so much for reading. That's on Substack, so you can subscribe there. I'm of course on LinkedIn so you can find. Find me there. I work with a company called Highline Wealth Partners, Highline Asset Management. That is my registered investment advisor. Support, let's say parent company. So I'm on their website there. I have my own website, Fairfax Advisor, which is actually going to be modified. But you can find me there too. Twitter, I'm on there too. Actually. The handle is Marco Madness 2. So it made a typo in the market. Was actually supposed to be macro. Macro Madness was Marco Madness too. So I post a fair bit of charts there and kind of interactive. Not too big on other social media to be honest. But yeah, I think those are the places. And obviously I appear on. On financial media.
- [30:49]
A
Cnbc, CNBC all the time. Every time I turn the television on, you're sitting there.
- [30:53]
B
Yeah.
- [30:54]
A
Ben, I really appreciate your time.
- [30:55]
B
You're welcome.
- [30:56]
A
And thank you so much for coming on.
- [30:57]
B
Thanks so much, Phil. It was great to speak with you. Thank you.