The Compound and Friends: Episode Summary Episode Title: The Real Reason Treasury Yields Rose With Nick and Jessica, Election Bets and Market Vol With Callie Cox
Release Date: October 29, 2024
Host: The Compound (Josh Brown)

Introduction

In this episode of The Compound and Friends, host Josh Brown invites experts Nick Kolis and Jessica Rabe from DataTrack Research to delve into the intriguing phenomenon of rising Treasury yields despite the Federal Reserve's rate cuts. The discussion spans multiple facets of the financial market, including election betting markets, equity returns, market volatility, and the behavior of mega-cap stocks.

Treasury Yields and Fed Rate Cuts

Josh Brown kicks off the conversation by addressing a pressing question: “If the Fed is cutting rates, why is the Yield on the 10-year Treasury going higher, not lower?” [02:32]. Nick and Jessica explore four potential scenarios to explain this counterintuitive movement:

1. Head Fake: The rise in yields could be temporary, disappearing as swiftly as it appeared.
2. Bond Vigilantes: Concerns over deficits and national debt are driving yields up.
3. Unwind of Recession Bets: Money previously invested in bonds due to recession fears is now being withdrawn as those fears subside.
4. New Market Bets on Growth: Investors are betting on higher economic growth and persistent inflation.

Economic Indicators and Bond Yields

Jessica Rabe presents data supporting the third and fourth scenarios. She highlights strong job market indicators, such as low initial jobless claims and sustained wage growth, suggesting economic resilience. [04:46] Jessica emphasizes, “wage growth remains sticky because US Workers still feel they have decent bargaining power with the still growing U.S. economy.” [07:10]

Jessica further discusses the Atlanta Fed's GDP Now model, indicating robust economic growth projections for Q3 and Q4, which likely contribute to the upward pressure on yields. [08:29]

Nick Kolis provides a historical perspective, comparing current yield conditions to those in October 1964 and October 2004. [10:25] He concludes that despite the increase in debt-to-GDP ratios, yields remain anchored by inflation and real rates, disputing the notion that deficits are the primary driver.

Gold, Silver, and Bitcoin: Safe Haven Assets?

The conversation shifts to the performance of gold, silver, and Bitcoin. Nick explains that the surge in gold prices is not directly linked to deficit concerns but rather to geopolitical instability and the diversification strategies of non-U.S. central banks. [14:04] He notes, “Gold is a better reserve asset in some ways than Treasuries... it's a physical asset.” [15:22]

Josh Brown concurs, suggesting that gold serves as a hedge against political instability rather than just inflation. [16:57]

Deficit Concerns and Bond Market Reactions

Addressing comments by Paul Tudor Jones on the importance of federal debt, Nick argues that without a clear catalyst, deficit concerns alone do not justify the rise in yields. [18:10] He states, “We don't know why now.” [19:12] The discussion underscores the absence of a tangible trigger for deficit-related market movements, reinforcing the idea that economic strength is the main driver.

Election Betting Markets and Market Influence

Josh introduces the topic of election betting markets, highlighting the growing trend of investors placing bets on election outcomes. [19:54] Nick analyzes offshore betting odds, noting a tilt towards Trump but acknowledging the uncertainty of predefined catalysts. [21:15] He raises concerns about potential market manipulation, questioning the influence of large bets on election-related assets. [22:54]

Jessica and Nick debate whether betting markets could surpass traditional polls in accuracy, with Jessica optimistic about their potential effectiveness due to the financial stakes involved. [24:02]

3-Year Rolling Returns of S&P 500 and NASDAQ

Jessica Rabe presents an analysis of 3-year rolling returns for the S&P 500 and NASDAQ, showing that both indices have historically yielded strong positive returns with high win rates. [24:59] She notes, “the average 36 months of price return from 1974 to now is 29% for the S&P 500.” [27:31] The discussion emphasizes that current market performance aligns with long-term averages, suggesting no immediate signs of overextension despite recent volatility.

Market Volatility: VIX and MOVE Index

Michael Batnik introduces the VIX and MOVE indexes to assess market volatility. He explains that the VIX has risen unusually high alongside the S&P 500, a rare occurrence indicating potential market unease despite overall stability. [31:30] Callie Cox observes, “it's weird that the VIX is rising even though volatility is not showing itself inside the stock market.” [44:31]

They discuss the implications of increased volatility measures ahead of the election, suggesting that institutional positioning anticipating market reactions contributes to the elevated VIX levels. [48:17]

Stock Market Calmness Ahead of Election

The hosts examine the atypical calmness of the stock market in October, a month traditionally marked by high volatility, especially during election years. [50:25] Michael notes, “It's the first October in an election year where the S&P hasn't had a 1% up or down day since 1968.” [53:04] Callie underscores the disconnect between historical volatility patterns and current market behavior, attributing the calm to widespread market positioning and economic stability expectations.

Mega-Cap Equities and Market Cap Comparisons

A startling comparison is made between the market capitalizations of mega-cap stocks like Nvidia and entire national economies. Callie Cox highlights, “Nvidia is worth more than all of New York City real estate.” [69:56] Michael adds context, pointing out the global investor base supporting such valuations, yet questioning the sustainability and fundamental support for these immense market caps.

Profit Margins and Market Corrections

Jessica Rabe and Michael Batnik analyze profit margins across different market cap segments, revealing that only the top 50 companies maintain rising margins, while smaller caps experience margin compression. [72:39] Callie stresses the importance of profit margins as indicators for market health, stating, “Tell me what the margins are going to be like. That is so much more informative for where the market is going.” [74:06]

Michael concludes that profit margins have historically correlated with market corrections, emphasizing that current margin trends suggest sustained market performance contingent on continued earnings growth. [77:22]

Conclusion and Next Steps

As the episode wraps up, Josh Brown and guest Callie Cox preview the next episode's focus on post-election market reactions. They reiterate the importance of fundamentals over political noise, encouraging listeners to maintain a long-term investment perspective. [81:07]

Notable Quotes:

• Josh Brown [02:32]: “We have a big one for you tonight...”
• Jessica Rabe [04:46]: “Wage growth remains sticky because US Workers still feel they have decent bargaining power with the still growing U.S. economy.”
• Nick Kolis [10:25]: “Yields remain anchored by inflation and real rates, which historically are very much in line with what we see today.”
• Callie Cox [14:04]: “Gold is a better reserve asset in some ways than Treasuries... it's a physical asset.”
• Michael Batnik [31:30]: “The VIX is a gauge of near-term market fear.”
• Callie Cox [69:56]: “Nvidia is worth more than all of New York City real estate.”
• Josh Brown [75:53]: “Markets are high. Stocks, businesses are doing well. No bad news, but the expectations are higher now.”

This episode offers a comprehensive analysis of the current financial landscape, blending historical context with contemporary market dynamics. Nick and Jessica provide data-driven insights that challenge prevailing narratives, while Callie Cox adds nuanced perspectives on investor behavior and market psychology. Listeners gain a deeper understanding of the intricate factors influencing Treasury yields, election-related market movements, and the enduring importance of profit margins in shaping market trajectories.