Market Recap: Bitcoin | Market Bubble | Market Fragility | Commodities
– Jack Mallers explains why Bitcoin is the hardest asset to hold, its role as a superior store of value, and how his platform Strike empowers users to maximize Bitcoin’s potential. – Henrik Zeberg discusses the current deflationary environment, the risk of stagflation, and the “everything bubble” impacting markets. – Jesse Felder explores the relationship between a strong dollar and US stock performance, passive investing dynamics, and the risks of market fragility. – Jared Dillian weighs in on the future of commodities, the potential devaluation of the dollar under the new administration, and the importance of rebuilding global economies.
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Andrew Brill 0:00
Newest indicators show inflation continues to be a little sticky as we await the Fed’s decision on the final rate cut of the year, wealthion is here to give you insights that will help you navigate your financial future. I’m your host. Andrew brill, welcome to wealthion’s weekly market recap. Let’s see what our experts had to say this week.
Andrew Brill 0:22
Jeff Jack mallors, CEO of the crypto platform strike was Anthony Scaramucci, guest on speak up this week. What is strike? Jack answers that question for you. Also talks about why you should consider investing in Bitcoin. Jack also talks about the global implications of Bitcoin.
Anthony Scaramucci 0:42
Why? Somebody needs to know about Bitcoin, why somebody needs to at least think about investing in Bitcoin and making Bitcoin part of their investment portfolio and part of their lives. Who’s in the position that I just described?
Jack Mallers 0:57
Yeah, well, I think fundamentally, Bitcoin is designed to be a superior asset for you to hold. We can spend hours on this podcast talking about how and why that is, I think simply put, it’s because it’s the hardest asset you can hold. And hard is in reference to how hard is it to make more of it, how scarce is this thing? And bitcoin is the scarcest thing you can own, period. And what do I mean by that? Well, Anthony, if everyone listening to this wants an iPhone, Apple can increase the supply of iPhones and get them one. If everyone in the world wants a McDonald’s cheeseburger. McDonald’s is gonna find a way to get him a cheeseburger, equivalently if the price of gold goes up 10x and everyone is in demand for gold. Elon told us he’s gonna go to some other planet and get more. So the idea in financial markets is, with more demand, you will find more supply. You always will. Now bitcoin is the only thing you can own. Where that’s not true. With more demand, we cannot find more supply no matter who you are, no matter where you are, no matter what you are, we can’t make any more and so it’s for that reason that more demand has to find a higher price, because the more supply that’s being demanded is coming from the market. It’s coming from the existing holders. So if you want more Bitcoin, you got to bid it to a higher price. And it’s the technology and the innovation and Satoshi nakamotos breakthrough that’s built such a scarce thing. But fundamentally, why you would hold it versus other things is because it is harder, because it is scarcer, and because it will outperform and find a higher price for those fundamental reasons.
Anthony Scaramucci 2:44
You and I agree on all that, but you created something called Strike. Tell me what strike is and tell me how strike is used by so many different people. What’s the value of strike and what’s the future of strike? Where? Where are we five years from now with strike.
Jack Mallers 3:01
Yeah. So the reality of strikes founding was baked into this idea that crypto at large was born. And you and I may differ on this where there was now. So just a reminder for everyone, I’ll say it again. I’ve been in this space for 12 years. So end of 2012 early 2013 and so I was around when there were no alt coins, there was just Bitcoin or there were scrappy ideas, but they weren’t to be taken seriously. So I watched the birth of Ethereum and the birth of Litecoin and all of these coins. And when I saw businesses like Coinbase start to pivot and make that their main focus, it doesn’t make it a bad business. In fact, Coinbase is a public company. You can go look at their financials. It’s a good business, but I disagreed with the opportunity and what their focus was, and who was serving the bitcoiner as a customer. And so when I founded the company, I was in my mid 20s, and it was really that I thought Bitcoin was the opportunity that speculative trading and high risk assets, like cryptos that I thought weren’t like Bitcoin at all was a distraction, and I thought that there needed to be a financial institution that actually enabled all of bitcoins potential for customers, and that Bitcoin financial services like buying it, selling it, Storing it, moving it, getting insurance on it, borrowing against it, using it for cross currency payments. No one was working on these things, and everyone was waiting for the new coin. And so that’s when I founded strike, and we really found our stride after the industry blew up, believe it or not. So when FTX went down, when blockfi went down, we saw a ton of growth in customers that were like, I value Bitcoin. I think it’s the pristine asset. And what I’m looking for is a financial institution I can trust that’s the best in class at Bitcoin, and that focuses on Bitcoin financial services. And so when I founded the business, really, I mean my whole career. Year, I was like, well, Mount Gox is going to be the Bitcoin company for the world, and I’m just happy to be here. And that didn’t turn out to be true. And then I thought, Well, Brian Armstrong surely is going to figure that out, and he doesn’t seem to be as interested in Bitcoin as I am. And then I thought, Sam bankman freed and binance were 10 times smarter than I was, according to the media, and that turned out not to be true either, and where we found ourselves is the most licensed, regulated, Bitcoin focused company in the world, that our customer is the Bitcoin or our customers, those that are looking for high quality Bitcoin financial services from a compliant, regulated, trusted custodian. And that’s who we are right now. And I think we’re gonna have a lot of upside running that business over the last 10 years, if we can continue to do what we’ve done, that’s my thesis.
Anthony Scaramucci 5:43
What you would say to other countries in that situation. So question one, are other countries going to do what El Salvador has done? Is that your prediction. And then number two, what would be the messaging to these other countries? What would you say?
Jack Mallers 5:59
I think whether so, I’ll take the second question first, whether you’re a country or a family or a corporation or an individual, especially in lesser served emerging markets, what you’re looking for is growth and stability. You know these people as a reminder to everyone listening, you can’t buy Apple stock. You cannot invest in Miami beachfront property. You don’t have access to index funds from the smartest financial minds in the world, with the biggest capital basis of all time. You have maybe the naira, and that’s it, your local community shillings. And so the fact that you have an asset that on average, over the last 10 years is 63% annualized return. So it’s the fastest growing thing that any of us could have owned. I mean, it’s accessible to everybody. So it is a life raft in that sense. And whether you’re a country and you are in debt, listen, we talk about these metrics, like debt to GDP, how much have you borrowed versus how much growth are you producing to pay that back? We’re all looking for growth, and you can buy growth off the shelf. All 8 billion of us. Is a way to think about it, as a government if you’re interested in growth, if you’re interested in productivity, you could say, I’ll take a burger, small fry, a Coke Zero and 63% year over year growth over the last decade. That’s not a bad deal. That’s not a bad lunch order. And so for the individual in the family, it’s very similar in the same you know, for El Salvador as well, these people don’t have access to Google engineers. They don’t have access to mines like Michael Saylor. They don’t have access to consumer innovating mines like Jack Dorsey. But being a part of Bitcoin, they did. They were benefiting from the work of MIT professors, from Michael Saylor, from Google engineers, from Jack Dorsey, from the world’s work on an open, distributed network. So you’re joining a global team of the smartest minds and the most powerful computing network in the world, and you get access to the best performing asset that’s even outperforming guys like Ken Griffin. And that was the message is that join this team. Network effects and economies of scale are going to take you. You actually need to humble yourself. This goes message to myself in the mirror, humble yourself. You’re not the main character. You’re not going to advance this any more than the greater good. And so just be a part of it. Be a part of it. Realize it’s bigger than you, and that’s when you start to gain that benefit is when you realize I was wrong about this thing. This thing is bigger than me, and all I need to do is subscribe to it and align myself with the fact that it’s a system with equal rules and equal rights. And you know, it was better to buy it when I heard about it, but the second best time is now, and that’s a lot of the conversation with them. And for the my speculation on countries, I’ll keep this one short. I actually knew fairly quickly that we were not going to see other Latin American countries. El Salvador was unique in this way, Anthony, they didn’t have their own currency. So for those that don’t know, they lost their own currency in a civil war, so decimated the whole place and really put it back many, many decades in violence and gangs and a lot of civil unrest. Whereas people like to compare Argentina Malay, yeah, but they get to print money. Money’s our time and energy in an abstracted form. It’s very difficult to forgive the ability to print that, to print time and energy. And so I couldn’t really figure, I mean, maybe there are economies and markets in countries like Panama, but it was not going to happen from another country that could print their own currency. And I almost took that next leap and thought, Well, who would the central bank and with the money printer is going to adopt this? And I did, genuinely, I swear to you, I thought the United States. And I thought the United States because the world reserve currency status, we have so much debt. And what do you want to back your debt with? And really, the way I think about it, your future promises you want to instill confidence in your future and the promises that you’re making about your future, about your economy, about. Stability, about your ability to harness technology, about your ability to localize and grow talent in the country. And that, to me, was Bitcoin, and so it doesn’t surprise me that it was part of this election and that we’re still hearing positive rhetoric from this new administration. So that’s more my prediction is that if we are going to see a more advanced adopter that isn’t El Salvador, that didn’t even have their own currency. I do think it’s going to be the US, believe it or not, before it’s someone like Argentina.
Andrew Brill 10:32
Are you concerned about your financial future or think your investments could be doing better? I’m Andrew brill, one of the hosts here on wealthion, and I’ve been there not sure my money was in the right places. It’s why I’ve gotten help from a financial advisor. Maybe it’s time you think more about your financial future or get a second opinion about your investments. We’ve made that process easy. Simply go to wealthion.com/free, to speak with one of wealthions registered investment advisors for a free no obligation portfolio review. Again, that’s wealthion.com/free. I’m now less anxious and confident I can achieve the financial goals I’ve set for me and my family. Hendrick zieberg, the head macro strategist at Swiss block, joined wealthion this week. He explains the business cycle and the inflationary environment that could accompany the incoming administration. And Rick also believes we are in one big bubble, and he explains the totally different approaches of Michael Saylor of MicroStrategy and Warren Buffett.
James Connor 11:36
And before we do a deep dive on where you think these specific markets are going, why don’t we first just touch on your analysis and how you in your approach, use a business cycle approach. Just tell us a little bit more about that. Yeah, so
Henrik Zeberg 11:49
my business cycle is based on three different indicators. There is the leading, the coincidence and the lagging indicators, the leading indicator, and these are all you know, data that we can get from from the Conference Board. You can get it from Fred, you know, there is just data you can get on online, actually. So it’s not something, you know, in the magic box, but it’s the way you also use these things, and how you understand that they are actually the the sequence of things. And I think that is where many, a lot of people are. You know what? What inflation is that before you see the economy is, is developing in certain way, and so on. And this is actually the sequencing of it and the understanding of that, which is extremely important. So what I see is that we have had the leading indicators leading the economy into a slowdown, and we I’ve been waiting for now to see that the coincident indicator, which is the real economy, which is the production level, it’s the NFP numbers, non farm payrolls and so on, actually starting to show that weakness. And then you have the inflation, the rates, the yields, which is the lacking indicators for now we’ve seen the leading indicators been declining for 24 months and so on, which is the equivalent of what we saw into the financial crisis. And we actually started to see that the lagging indicators in my model is starting to show a lot of weakness there, which is a little funny, because in that, you know, in the tweet, and the time between there, we should actually have seen the coincident indicators, meaning the non farm payrolls that we had on Friday should start to deteriorate and the labor market, and I actually think that is happening underneath the hood. And if you really look, you know closely, you will actually see that the non farm payrolls that we’re getting out these days are just, I mean, I don’t trust them a lot. That’s just put like that. So, so I think the economy is in a much worse place than than most people actually understand at this
James Connor 13:32
point in one of the big unknowns about 2025 is that we have a new administration coming in, and there’s going to be a lot of changes, a lot of policy changes, deregulation, taxes, reduction in taxes and increase in tariffs, and also changes to immigration. And we really don’t know the impact what, what all of these changes are going to do to the economy, but to me, a lot of them will be inflationary. Like if you cut taxes, that’s going to be inflationary. People are going to spend more. If you impose tariffs, that’s going to result in higher inflation. Are you not concerned we might see a pickup in inflation in 2025
Henrik Zeberg 14:09
Yeah, sure, absolutely. But again, I think that’s what I talked about also in previous shows. I think there’s going to be a whipsaw. So I think that we, what we’re going to see is that the will, the deflationary forces that are in play right now, are in control, and that we can see, because people are not spending, you know that as they they they should, and we see the, you know, the consumption simply not being there where it’s supposed to. So we don’t, we don’t see a pickup in that, like so inflation could become a problem. In order for inflation to become a problem, we need to see exactly that. We need to see exact spending. We need to see that the money starts to circling faster and faster, we don’t see that. And that’s why I say that the deflationary forces of the economy right now is in control. And I think the Fed is scared of some of these things here and what it unleashed. And that’s why, if you look at the momentum charts, for for inflation and for, for also, yeah, for yields, also, then the momentum is to the downside at this. Point, what you’re then talking about is things that will come through and will be happening at some point in 25 but that’s not creating inflation at this point. That will create the opposite again. But and then you can have the, you know, the perfect cocktail there, because then you may also have the Fed coming out blazing, because they say, Oh, now they stare at the inflation again in the face. They will have to do something. And then you have all the things that can come out there from the from the administration as well. So yeah, I do, and I do fear inflation, but, but not at this point. And again, it’s not just about one direction or the other. Actually, these things can turn pretty quickly and and especially if you have a downward force and you got all these things sitting in motion, then the upward force and inflation can be setting in doing 25 late 25 I would think, and then into 26 and that would be the next problem, especially if the economy is still sluggish. And I think it will be, because then you’ll have the worst thing you can have a sluggish economy while inflation is picking up, which is stagflation. And that will be bad for a lot of people.
James Connor 15:58
And I think one of the things that really shocks me about this market, or maybe in the last five years, is it’s just not one bubble, but it’s mini bubbles, right? And it says it’s what John Maynard Keynes called animal spirits, and that’s what’s feeding everything, and I guess it has to do with cheap money also. But cryptocurrencies, right? There’s over 9000 different types of cryptocurrencies. Now, nfts, you may recall, I think it was in 2021 somebody paid $69 million for an NFT by an artist by the name of people. And then we had the metaverse, and that was another bubble. Now, nobody talks about nfts or the metaverse, and now, I guess the big bubble is anything and everything to do with AI, and the poster child for AI is Nvidia, and it’s up 180% on the year. But maybe you can just speak to these bubbles. And I know you’re a real student of the market, but how does this time we’re living through right now compare to other bubbles? And why do you think it just keeps going from one asset class to another? So
Henrik Zeberg 16:58
I don’t think there’s we talk about many bubbles here. I think we’re talking about one big bubble that is just, you know, keep developing. And we haven’t really seen the popping of that. We’ve seen a decline in the markets, but it’s just been if it was saved again, also even in Coronavirus, you know, and all the things we have seen over the last few years is just, you know, adding up to, to the big one that we have right now. So I think I talk about we, what we have right now is the everything bubble, we have a bubble which includes, you know, you know, crypto and AI, and everything we have, because everything has been, you know, just been thrown money at it, and that’s what we see developing. So I don’t think it’s these are, you know, small, new things that are going it’s just part of the whole thing. And that comes back to the whole, you know, what is the, really, the driver of this. First of all, it’s the easy money. You know, environment we have for so many years, and it’s been changing over the last few years here. And I think that is what’s going to change a bit, do a big change down the road, but for the until you can say that the inflation started to move up. We was, we saw that money was just thrown in everything. And we had these new technologies coming out. We had AI, we have blockchain, we have all these things which are wonderful technologies, and they will change the world 100% they were going to change the world just like what we’ve seen so many times before, when the, you know, the railway came out, and we had the technology of the steam engine in the 1850s you had the automobile and so on in the 19 early 1900 and you know, all these things are things, technologies that comes up and what happens every time around that you can also go back into, you know, 170 years to look at around the railways, at the rail road and the steam engine. You have bubbles emerging from that. You have, you know, companies popping up and say, Oh, now this is going to be something fantastic. And everybody’s trying to figure out how it all suits, you know, fits in. And that’s, that’s what happens this time again. So you’re talking about those, you know, 1000s of cryptos there. I can tell you that I think 99% of those, and 99.9% of those are going to be worth it worthless within a few, a couple of years. And I’m even in some of these right now. So it’s the technology now, beneath it’s the blockchain technology. It’s the AI, but it’s not the whole speculation around this right now. And that is where market is sometimes front running things and try, oh my god, this is fantastic. And they just throwing the money into it, which builds up the bubble that then bursts. We’ll see some, you know, big declines in the market. And we’ll see also a lot of failures in some of these, you know, you know, exaggerated, you know, in terms of valuation the companies. And then we’ll see that the real ones will then emerge from this, the whole decline. So you will see that there will be another, you know, whatever is going to be is going to be Amazon, or whatever we saw after the 2000 also with bubble there, so we will see that. But it’s not going to be the 1000s or the hundreds of them that everybody seems to believe now. It’s going to be the normal cycle, as I see it. We’re going to have the bus, we’re going to see a lot of these fail, and then we’ll see a few of them emerge. And there will be a real business at the case on those and and that’ll be due to the tick. Technology that is behind this, the technology that will drive but it’s it is not that will save the world. At this point, we will have the bust, and then the next, the fourth, you know, industrial revolution is going to be set in motion by some of these technologies. I’m quite certain of. I
James Connor 20:16
touched on nfts, but I don’t know if you saw that. Recently there was a cryptocurrency investor. His name’s Justin Sun. He paid $6 million for a pizza bar, which was essentially a banana duct taped to the wall. Did you see that?
Henrik Zeberg 20:29
Yeah, I rest my case. I mean, this is this is the craziness, this is the stupidity that we see in every cycle and every time we are told that this is time is different, and no, no, no. And you don’t understand Henrik. And I know this, this is the thing. So yes, I did see that. And again, it’s just like another tick in the in the box saying, Okay, we got this kind of stupidity. Obviously, we are getting closer to it. So yeah, what
James Connor 20:53
was he? What was even better is that he called a press release, I guess just to probably did it for publicity, and then he actually ate the banana.
Henrik Zeberg 21:00
Yeah, I saw that. So that’s why Henrik,
James Connor 21:03
we can’t discuss Bitcoin without talking about Michael Saylor and MicroStrategy. MicroStrategy was up 500% on the year. I wish I was long, but I’m not, and now it’s up, I think just over 400% it’s pulled back quite a bit. And because he’s raising money, and I don’t know if you’re hurt, but Michael Saylor has implemented this 2121 plan. He wants to raise $21 billion in cash, $21 billion in debt, and he’s going to put the proceeds into Bitcoin. And I’m not even sure how much he spent thus far. But do you see this as another sign? Oh, yeah,
Henrik Zeberg 21:38
absolutely. And him, you know, appearing on TV and talking about on media, talking about how we should, US should sell all its gold and buy bitcoin. I mean complete craziness. I mean stupidity, honestly. And so just to be frank here, obviously, this is, again, one of the I actually had these very high targets on my on my own MicroStrategy. I could see it also. And I actually think there is, I haven’t studied it, just for the last couple of weeks here, so I could see there could be another high on it, because I think there is little going to follow Bitcoin. So I think with this, bitcoin does not follow found its top yet. And I think there is a significant upside still on Bitcoin well. So I think microstate can move even higher here. But it’s again, I have to say. And you know, we can be on here again in a year’s time. I think when we sit here again next year at Christmas, new Christmas tree, MicroStrategy will have crest, you know, tremendously. And we know, just like, straight down to a certain point also. So it’s, it’s, you know, what he’s doing here is a very dangerous game, and just about betting, all, you know, your whole, you know, existence, on a on a crypto, on Bitcoin, and just saying, you know, it’s just going to go up all the time. It’s yielding zero. And if we get a deflationary bust, and I’m talking about, and we get a stagflation as well, you know, Bitcoin is not going to do very well. So I think it’s a very dangerous game that he’s playing. And yeah, it will work sometimes, and then we know he’ll be a villain for certain, for third, certain amount of years. But I just think this time around, if we get the lows that I can see in Bitcoin coming in after this, this top here, then it’s not going to go well, well for for MicroStrategy, but hey, he’s up a lot of percentages at this point. But we have seen this before. We see how things go straight up. And then the in the Eiffel Tower, it normally comes straight down again. I think that’s going to be the case here as
James Connor 23:28
well. So it’s interesting to see Michael Saylor going all like risk on in a big way, and he’s going all in on Bitcoin. And then Warren Buffett, he’s at the other end of the spectrum, and he’s raising cash. He’s sitting on a record level of cash right now, $325 billion yeah,
Henrik Zeberg 23:47
I think, I think if I have to choose between the two, I know, I will put my money on that. And I think it’s, you know, it’s again, in a crazy world, the crazy person will seem normal and but the problem is we are in a crazy world right now, so the crazy people are the ones that will seem normal because they do the crazy stuff. Fact is in the real world that we will get back to it when we see the bust also, you know, the way of running a business, like what Warren Buffett does, and obviously he’s been proving, who am I to actually even just talk about that he is he, as I see, this is the way to do things. And at this point here, when you have crazy valuations, you want to raise your cat, you want to raise cash, you want to make sure that you are ready for the next decline. You get ready for that your credit lines and so on. And then the, you know, let the crazy people talk about, you know, buying bitcoins and selling gold and and doing, you know, and buying bananas from his tape duct tape to the walls. I mean, these are the kind of things we see in the crazy worlds. And again, I said the crazy people will seem normal for a certain amount of time, until the point where, where the shit hits the fan. But that’s not a popular thing to talk about. So when you I talk about this with people, don’t say because you don’t understand it. You don’t understand AI, you don’t understand crypto. So. So that’s why this time you’ll be different. This time is different, and let’s see Jesse
Andrew Brill 25:04
Felder, CEO of Felder research and author of The Felder report, joined us this week. He’s concerned about CEOs cashing out chunks of their own company stocks. He believes this is a sign of things to come. He also discussed what a strong dollar means for the stock market. Jesse also spoke about passive investing and what it means for retail investors, along with the possibility of a major market downturn, is the strength of the dollar a driver behind a lot of foreign investment into the US stock market.
Jesse Felder 25:39
Yeah. I mean, one of my favorite charts is there’s a almost a perfect correlation between the relative performance of US stocks and the dollar. Right? US stocks outperform foreign counterparts when the when the dollar goes up, and that’s just a reflection of dollar, you know, money coming into dollars. Where does it go? It goes into the into the stock market. I thought it was interesting. You know, Rutger Sharma is one of my favorite editorial writers for the Financial Times. He’s the chair of Rockefeller internationally. Wrote an interesting piece last week about he called the mother of all bubbles in the US stock market. And he may he, you know, kind of outlines this point that US stock market has been, you know, magnet for foreign capital for a number of years, and he was at an investment conference in Singapore recently, the moderator asked, How many people in this room don’t own Nvidia? And not a single hand went up. So it just tells you, you know, globally, everybody you know wants to own the Magnificent Seven and all these stocks and and that is a trend that coincides with dollar strength. So you know, if we’re going, if we are seeing potential another peak in the dollar similar to kind of what we saw in that 2002 time frame, then you know, we’re going to probably see the outperformance of US stocks potentially reverse course, and real assets probably outperform financial ones generally, just like they did from that 2002 to 2012 time frame.
Andrew Brill 27:12
So as the incoming administration and Scott bass trying to devalue the dollar a little bit, that would mean there could be a an, I guess, an outflow of cash from US stocks at that point couldn’t there. And that could be a good, I don’t want to say, cause a crash, because I don’t want to, you know, set off any alarm bells, but it could seriously go down a little bit,
Jesse Felder 27:38
yeah, you know, I mean, there’s, there’s a lot of foreign capital in US stocks. I think there’s evidence to see, you know, Japanese investors, Korean investors, even Chinese investors, support a lot of money into US stocks. I think, honestly, the bigger risk I’m concerned about in the short run is not necessarily foreign capital flight. It’s the fact that active, you know, the few active managers left in the market today have realized the only source of outperformance, or even even generating returns, is trying to front run passive flow. So much money has gone into passive and Mike Green wrote an interesting piece on this over the weekend about how, you know, literally, value investing hasn’t worked. You know, reversion to the mean hasn’t worked in any respect, in terms of for active, active investors. And what has worked is momentum. And the momentum factor over the last 12 months has had one of its, you know, best 12 month performances in history. You know, going back through the market. I mean, I think it’s 1999 and 2021 are kind of the only times we’ve come close to what we’ve seen. And I think that is just a a, you know, a function of active managers, you know, hedge funds and these types of things, realizing when there’s a lot of passive money coming into the market, we’ve seen record inflows into Vanguard funds and passive vehicles. This year, the best way to make money is to front run those flows. And so you get, you get a compounding effect in the markets, where everything is highly leveraged to flows, and that, you know, obviously creates some fragility, because as soon as you don’t, soon as those flows, you know, Peter out or reverse, course, everybody is on the same side of the boat, and that trade reverses. And I think that’s something that not enough people are really paying attention to. The you know, the history of the momentum factor also shows, whenever you have a year of big, strong momentum, there’s usually a painful hangover on the other side of that, it’s a very close correlation. It’s actually a very good predictor of 12 month returns in the s, p5, 100, the momentum factor. So you have a really good, strong year in momentum typically leads to a reversion in stock prices. Broadly speaking, over the next 12 months, we’ve
Andrew Brill 29:58
had Mike on, and he is. Very concerned about that passive investing, because it’s done a lot by algorithms. It’s not even someone saying, Okay, we’re gonna, we’re gonna invest in this. It’s like, Look, if one numbers off slightly, doesn’t matter whether there’s a good reason or not, that passive investing could flow in or out very quickly, and it’s the retail investor that gets hurt. Yeah,
Jesse Felder 30:22
yeah. And I think that, you know, it’s, as I mentioned, we’ve seen record inflows into passive this year. And so the best performing strategy in the market has been front run. Front run those passive flows. How do you do that? You buy the biggest stocks in the market. You buy the Microsoft, Nvidia, Apple, and, you know, I just look at a stock like Apple trading at 40 times earnings, witnessing its slowest revenue growth and earnings growth over the next, you know, 12 months, it’s seen in a long time, and its highest valuation at the same time. To me, that is just, you know, the fingerprints of passive, right? Who’s willing to pay a record valuation for a company that’s seeing its slowest, slowest growth, you know, going forward, and that’s just price, insensitive, insensitive buyers, and so, you know, it’s, you know, on the flip side of that too, you have Warren Buffett offloading the majority of his apple stake, because I think he’s realized these dynamics that, you Know, at 40 times earnings, it does not It’s not nearly as compelling a prospect to own this stock when it was 15 times earnings and they had a bunch of, you know, stock buybacks that they could implement in the future. I think it’s also telling that, you know, Apple’s net cash relative to its market cap is essentially nil now. I mean, they essentially to have almost no cash, net cash on the balance sheet relative to their market cap when it was, you know, 15, 20% only a few years ago. So you know that that opportunity to buy back massive amounts of stock at low valuations is behind it. That’s also been, obviously one of the drivers. But to me, it’s more more function. I think Apple’s kind of a poster child of how does passive affect the market? Well, take one of the biggest, you know, slowest growing companies and put a record valuation on it. It’s not a coincidence that there’s been record flows into passive this year driving that, that valuation extension. Do
Andrew Brill 32:17
you see a market crash coming at all? Or a big election,
Jesse Felder 32:23
you know, I think it’s, you know, foolish to try and predict a crash, but I will say that I think if we did have a stock market crash, I think you’d have to look back and say there were signs, right? And those signs are the strength in the momentum factor driven by this piggybacking on passive investing, and then, you know, the extreme leverage that’s being used today. I would just point to, you know, the assets in leveraged ETFs. You know, the Bloomberg published a piece, I think, on Friday, that showed at the 2021 peak that the assets in leverage long ETFs were five times greater than those in short ETFs, and that five to one ratio was a pretty bearish bear signal to on Friday, we hit 11 times. So we’re, you know, there’s, there’s, literally, it’s twice as extreme the amount of leverage and leverage ETFs today that we saw back in 2021 you know, there’s also things like the commitment of traders report. You look at small speculators in S, p5, 100 futures, and they’re about 10 times as long today as they were in 2021 so there’s, not only is there this piggybacking on the momentum factor, like I said, I think is front running the passive flows, but it’s they’re utilizing, you know, such a, such great, you know, great amount of leverage in order to do that, via leverage, ETFs, via futures, via these types of things. That it does concern me that once those flows reverse, and they, obviously, they always do, right? Nothing goes on forever. And these flows always go in cycles, right? They always go, you know, big year, kind of reversal year. And so I think when their flows do reverse, I am concerned to see, how does the the system kind of absorb this type of a de leveraging, because it’s really something we haven’t, haven’t seen before.
Andrew Brill 34:23
Good friend of wealthion, Jared Dillion, was back on wealthion this week. He spoke about the recent PMI numbers and the future with the new administration. He explains how Trump’s pick for Treasury Secretary, Scott Besant and Jerome Powell can work together, and Jared is a big believer there could be a turnaround for commodities in the near future. What’s your take on the present economy? It’s a little bit up, a little bit down, and not sure about the numbers.
Jared Dillian 34:55
Are you asking about the economy, or you’re asking about the market, the economy in general? Nothing wrong with the economy. The economy is fine. What I’m kind of waiting for is for some of the PMI numbers to come in after the election, to see if there’s going to be a bump in sentiment. You know, for the last two years, really, or year and a half, the PMI numbers have been pretty terrible, and you have to wonder if part of that was just pessimism around Biden being president, and maybe, you know, after the election, people will become more optimistic. But the funny thing about those PMI numbers is that as bad as they were, they weren’t really, for the first time, they weren’t really a good predictor of the economy. You know, I kind of remember being pretty new at Lehman and like, 2002 2003 and, you know, the Fed paid a great deal of attention to ism what, what they call back then, was nap them, if you remember that the National Association of purchasing managers. And, you know, if the if nap came in above 50, then the Fed was hiking, and if it came in below 50, the Fed was cutting. And we had a very long run of data with the PMIs below 50, and yet, the economy ended up being pretty strong, you know. And a lot of people pointed out that divergence between sentiment in the real economy, the economy itself was strong, but sentiment around it was really bad, and a lot of the reason for that was because of inflation. Do you
Andrew Brill 36:33
envision a better scenario under the next administration you had mentioned, maybe the PMI is not doing as well because of the administration. But do you expect that stuff like that will pick
Jared Dillian 36:47
up? Um, I mean, theoretically, yes. You know, every everything that Trump is doing is very pro growth. The pick of Scott Besson as Treasury Secretary couldn’t get, couldn’t really be any better. This is a guy who’s focused on, you know, reducing the deficit and cutting taxes, and Trump himself has focused on cutting regulations. So this is going to be a very pro growth four years, having said that there isn’t really a strong correlation between the stock market and a president’s policies. And if you go back to when Reagan was elected in 1980 you know, Reagan immediately cut taxes a lot, and cut taxes throughout both of his terms. But the stock market, you know, basically you had Volcker raising rates in 80 and 81 and we had a recession in 1982 and stocks very cheap. But the point is, is that, you know, Reagan had been president for about three or four years before the stock market finally started to go up. So I think a lot of people are expecting that, you know, we’re going to have four years of Trump, and the the stock market is going to go from the lower left to the upper right. It might, it might not work out that way, you know, for a whole bunch of reasons. And if you look historically, you know, the stock market, if you just go from start date to end date of presidencies, the stock market has done better under Democrats than Republicans. There’s a whole bunch of reasons for that. You know, a lot of times the stock market will be pricing in a Republican presidency while the Democrat is president. But nonetheless, I mean, I guess, I guess, what I would say is that people’s expectations, I think, are a little excessive here.
Andrew Brill 38:37
So if we bring it down a little bit, it really shouldn’t hurt all that much, but it may, may make things a little bit more efficient, that’s for sure. So Bessette is in charge. Is going to be in charge of the Treasury. It appears now that Jay Powell will be sticking around until the end of his term. How well do you think they work together?
Jared Dillian 39:00
I actually haven’t thought about this before. I mean, probably reasonably well. You know, they both, they both have a finance background. You know, neither of them are really academics. You know, basin is, you know, investor. He’s a hedge fund operator, and Powell is a private equity guy. I think they’re going to speak the same language, you know, we heard yesterday, the day before that, Trump is not going to try to replace Powell at the Fed, which I think is the smart thing to do. I think his replacement is going to be Kevin Warsh. Would be my guess, especially since, you know, worsh was being considered for Treasury, but didn’t get that. I think worsh is, we think worsh is probably going to be the next Fed chairman.
Andrew Brill 39:46
Do you think the Powell has done a good job in lowering inflation and getting it to a point where it’s doing okay? I
Jared Dillian 39:56
think he’s done I mean, look, I mean everybody, I think would have the same. Report card for Powell, he was slow to recognize inflation, but once he did recognize inflation, he acted very swiftly to bring it down as quickly as he could. So I give him kind of a b minus.
Andrew Brill 40:16
And where do you expect we go? In December, we’re probably about a week away from another Fed meeting and an announcement of a cut or not? Yeah,
Jared Dillian 40:26
I think we’re pricing in about a 90% chance of a cut. And I think that’s about right. I think we will get another 25 basis point cut, you know, but the fact, you know, we’re cutting interest rates 100 basis points while crypto is going bananas and the stock market is going bananas. And you know, not that I’m going to blame all this speculation on the Fed cutting 100 basis points. But basically, the Fed got spooked by some payroll data, and they panicked, and they cut 50 basis points back in September, which I think was a mistake in, you know, I think, I think I said this the last time we talked. I mean, I think I said that in 2025 they’re probably going to be taking back some of these rate cuts and actually hiking rates. So
Andrew Brill 41:13
you think that the new administration will be a little bit more inflationary then
Jared Dillian 41:21
in well, you know, it’s, it’s funny, because there’s, there’s so many dynamics here, inflationary, the economy is going to run hotter with Trump as president, But with them, with Biden as president. But my guess is, is that the Fed, which you know, not to get into politics, but they donate to Democrats, 10 to one over Republicans. My guess is, they would prefer tighter monetary policy while Trump is president, and then we were getting into, you know, Trump’s stated desire to have a say in the monetary policy process. And, you know, if Trump is agitating for lower rates, like he was in 17 and 18 with Powell, then that could, you know, maybe, let me just say, there’s a lot of uncertainty for next year. I don’t know. I don’t know what Trump is going to do. I think if Trump doesn’t interfere in monetary policy, Fed funds will be higher, but if he does, then we’ll see. So
Andrew Brill 42:31
let’s get into the stock market a little bit. The NASDAQ right near its high, s and p over 6000 The Dow is not far off its high. You’ve written that you’re bearish on stocks. Can you explain?
Jared Dillian 42:46
Yeah, I’m bearish on stocks, but I’m not doing anything about it. I think that’s like, I think you know my job as a newsletter writer is to obviously recommend trades to my subscribers, and I don’t want to be in a position where I’m telling people to go short and then the S P goes up another 15% and, you know, we get squeezed, and it’s terrible. And you know, so my job is to time it perfectly. And you know, in doing so, I’m paying a lot of attention to the technicals and in the price action, the technicals and the price action, and when I just see how the market trades, it doesn’t seem super copy to me. I still think we have some more upside if we don’t. I mean, if the market goes down five or 10% tomorrow, I’ll be happy, but, you know, I do think we have some more upside. So what I’m trying to do is to time it perfectly, so
Andrew Brill 43:50
you’re sitting tight for now, but if it goes down five or 10% are you putting more money to work?
Jared Dillian 43:57
Depends on the price action. It kind of depends on how it goes down. But yes, yes, I will probably, I mean, I, you know, there’s, there’s a portfolio in the newsletter, we have a lot of long positions, you know. And the one thing I’ve learned about bear markets is that if you have a portfolio of stocks, and you think to yourself, well, even in a bear market, this stock is safe, or this stock is safe, or this stock is safe. In a bear market, really nothing is safe, you know. So when stocks go down, they generally all go down, so I will be ruthlessly cutting long positions if the market starts to decline. So
Andrew Brill 44:39
do you have a feeling about where it might go. You say you’re not doing anything about it. So obviously you think there’s a little a little bit more of an upside. Do you have any inkling of where you think the market’s going?
Jared Dillian 44:50
No, I don’t. I really don’t. I don’t. Yeah, I mean this, you know, I look like. Yeah, I look at 100 charts a day, you know, whether it’s on Twitter or stuff that people send me or whatever. And you know, there’s a, there’s a very good research shop called sentiment trader, which they’re pretty good at putting together quantitative sentiment analysis about the market. And one of the things they’ve been doing recently is they’re looking at advances versus declines in the fact that we’re putting in new highs on successive days with more declines and advances. And they said the last time this happened was 1928 there’s they put out all kinds of good stuff like that. So I look at all this stuff. But you know, the price action is still is still fine. So
Andrew Brill 45:45
how are you feeling about commodities? You know, commodities have been low for a long time. As the dollar devalues and Trump tries to devalue the dollar, you would assume that people might get back into commodities. Where do you think commodities are going?
Jared Dillian 46:03
No, I totally agree with you. I think that’s going to happen. And if you look at a chart of a commodity index, like the B Com, or something like that, there’s, you know, you had a big rally in September, and the rally kind of faded, and we’re kind of forming a base. I think commodities are forming a base over time? Yeah. I mean, that’s kind of what I’m waiting for, is for some dollar jaw boning or devaluation that’s going to get the commodities market going again. I don’t think commodities are going to make lower lows. I’m pretty I’m pretty comfortable saying that. So
Andrew Brill 46:40
is that something you’re looking into?
Jared Dillian 46:44
Yeah, for sure. Yeah. Is,
Andrew Brill 46:46
is do the, I want to say this politically correct? Do the world events affect commodities? I mean, we’re gonna have to or somebody’s gonna have to rebuild Ukraine. They’re gonna have to rebuild Gaza. Syria is now in a state of disarray. Let there’s been bombings in Lebanon. So there’s, there’s places that need to rebuild, and they’re going to need infrastructure, steel, copper, for wiring, all these things that are commodities. Do you think that that helps the commodity market at all?
Jared Dillian 47:20
Um, it doesn’t hurt. It sure doesn’t hurt. I think that a bigger driver of commodities is China. And, you know, commodities went up in September because of the China stimulus, right? Like commodities skyrocketed. And I think if we get another round of China stimulus, I think that will do the same thing. You know, China, China. We could talk about China for like an hour, but they’re they’re in there in a position where they they have to continue to stimulate which is one of the reasons why I’m not bearish on commodities.
Andrew Brill 47:59
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