The Fed’s Dovish Hold & The 2024 Rally

James Connor 0:05
Hi and welcome to Wealthion, I’m James Connor. And today my guest is Ben Laidler, Global Market Strategist at trading and investment platform eToro. Ben and his team have been very bullish on the US market since last September. And today we’re going to get his thoughts on the recent announcement from the Fed, and where he thinks the market is going in the remainder of 2024. Hi, Ben, thank you very much for joining us today. How are things in London?

Ben Laidler 0:28
Yeah, my My pleasure. Ah, it’s a little bit drizzly, we love to complain about the weather. Princess Kate easter eggs, you know, that’s what we’re talking about.

James Connor 0:39
Yeah, there’s a lot happening. Now, before we do the deep dive on the economy and the markets, I want to ask you a very pressing question. Every time I go to London, I’m always looking for fish and chips. I’ve been to dozens of places and I have yet to find a good fish and chip place in London. People are always telling me you got to go to North, go to the north or go to Scotland. What are your thoughts on this pressing matter?

Ben Laidler 1:02
Well, I’m Scottish. So I’m not biased, of course. So I’m going to say a little East Coast fishing village called Anstruther, which you might have to look up on the map. But your best fish and chips in the UK I think voted by free magazine, which is a great has to be a great read. But yeah, Anstruther.

Speaker 1 1:24
Yeah,

James Connor 1:24
Yeah, well, thank you for those insights, I will definitely check that out. So let’s move on now. And before we talk about the economy, I want to get your thoughts on what you think is the most pressing issue in happening in the world right now. What are you most concerned about? What keeps you up at night?

Ben Laidler 1:44
Well, market should always be worrying about something, you know, the day that they’re not, is the day that we’re all being complacent and something dreadful is about to happen. But neither I think should these worries, keep investors out of markets, you know, we are just continuing to climb a sort of wall of worry. But I don’t think any of this is really going to derail the market. You know, what keeps me up at night? I guess the big one is just, you know, maybe how supersized US markets and tech, you know, have become the US is now over 60% of global market cap. Tech is 40 to 45% of that. So completely disproportionate. So there’s absolutely concentration risk there. I don’t think the US is necessarily going to stumble and the tech rally seems pretty well supported. But you know, God help us if it does. You know, if the US catches a cold, then you know, the rest of the world is getting pneumonia. So that context, I guess, keeps me up at night a little bit.

James Connor 2:44
So let’s talk more about the US economy and the US markets. And I want to hear your takeaways from this week’s decision in comments from the Fed.

Ben Laidler 2:53
So I think we’ve got a dovish hold, so to speak. And I think the markets were braced for worse than that. And hence, we’ve made a you know, a bit of a relief rally. We are still on track now for three interest rate cuts this year. And these cuts are one of the two pillars I think of the rally we’ve been seeing. So, so far, so good.

James Connor 3:19
And so you mentioned that we’re still looking for three interest rate cuts. It’s like, every time, every time the Fed meets, we’re always looking ahead for these cuts. But where do you see rates going? When do you see the first cut happening?

Ben Laidler 3:32
I think two to three cuts for the year, June but maybe slipping, you know, slightly later in the summer. But I’m not sure I would sweat the exact mounting magnitude or the exact timing, you know too much. And I think investors are sort of taking it in their stride. Remember, we came into the year expecting six or seven cuts, starting in March. And you know, now we’re looking at, you know, half that starting sort of halfway through the year. I think the reason we can be can be so ambivalent about that is the strength of the economy, the profits surprise that we’ve seen, you know, coming through, which is really sort of compensating and that is the other sort of pillar of this rally. So, you know, maybe we were making our money, just slightly different ways out of earnings and profits rather than out of interest rate cuts, but we’re still making money.

James Connor 4:25
So you made mention of how strong the US economy is, and it continues to be very strong, growing at four and a half to 5%. annualized. We’ve had 25 consecutive quarters of unemployment below 4%. The last time we saw that was in 1969. Are you concerned that the economy is still too strong and that maybe inflation starts to ignite again, or re accelerate and that we don’t get a cut this year?

Ben Laidler 4:52
So I think the economic strength and the 10% Plus earnings growth that that’s giving us is very positive for markets. But your points. The second pillar of this rally is outlook for rate cuts. And the easiest way to derail that is if we have a sort of comeback. for inflation, you know, the way this circle is being squared, you know, right now, when I think continues to be squared of how do we have such strong growth, and continued lows and inflation and calling for interest rate cuts, you know, this so called immaculate disinflation, it’s because the US is having a productivity boom, productivity growth in the US is twice long term average levels, you know, right now, so we’re all producing more for the same amount of efforts. And that’s allowing the economy to run strong, but inflation still to come down. That’s been driven by this tight labor market, and companies be forced to invest more in workers and workers to become more efficient. And this tech boom is also also helping a lot and probably set to continue, as you know, the AI continues to spread, you know, across the economy. So you know, it’s a long answer to your question. But you know, as long as we continue to see this productivity, boom, we’ll keep threading this needle, inflation will keep coming down, even as growth stay strong.

Speaker 1 6:15
So

James Connor 6:15
So if I understand you correctly, you don’t think there’s a recession coming in anytime soon? I mean, there’s we have this ongoing debate on whether or not it’s going to be a hard landing or a soft landing. What are your thoughts?

Ben Laidler 6:27
Yeah, I think it’s a no landing. So you know, the, the yield curve has been inverted, long term bond yields higher than short term, lower than short term bond yields. You know, that’s been a classic sign of recession to come. But it’s just been wrong for the longest time ever. And I think it’s gonna continue to be wrong, it’s, I think we’re absolutely going to have a slowdown from the current growth rates you’re seeing right now. But that doesn’t mean that we’re having a recession, I think it’s basically impossible to have a recession or anything like the labor market strength we’re seeing right now. And if I’m wrong, the Fed is now in a position to ride to the rescue, inflation is low enough that if we see a stronger slowdown than we’re expecting, then they can cut interest rates. So I think whether it’s the labor market, or whether it’s the Fed flexibility to cut interest rates, I think a recession is basically unlikely at this point.

Speaker 1 7:25
And

James Connor 7:25
And I’m glad you brought that up about the inverted yield curve, because, as you alluded to, this has always been like a historical indicator of upcoming recession. Right. And the yield curve has been inverted. Now for it’s an all time record. We just took it out earlier this week. But I think it’s is it over 600 days?

Ben Laidler 7:44
Yeah, something like that. Yeah, as you say, All time record.

James Connor 7:48
Right. And we just surpassed the record that was set in 1980. So what are your thoughts on this inverted yield curve? Is it no longer significant?

Ben Laidler 7:57
I think we need some humility. Yeah. I don’t think there’s a recession coming. I think there’s a number of other reasons why maybe the yield curve is sort of distorted this time. And it’s sort of long term track record, you know, maybe broken, whether it’s the sort of distortions of QE and and Qt, whether it’s the distortions from, you know, the unique COVID pandemic, and what that’s sort of done to the labor market. So I’m tempted to say there’s just enough one offs this time round, that maybe they’re, you know, the yield curve is sort of lost maybe this one time it’s um, you know, it’s unfailing you know, ability to see to see recessions.

James Connor 8:37
So that’s a good overview. Your thoughts on the US let’s move to Europe now. And you’re based in London, what are your How are things in Britain? How are things in the UK?

Ben Laidler 8:47
So I guess less bad. Um, you know, the UK economy hasn’t been in a good place. We’ve been sort of flirting with recession for a while, we’ve been we still have some of the highest levels of inflation amongst, you know, any new countries that we consider our peers. So it’s been a difficult time. But we’ve literally just come out of recession. We’re beginning to see inflation coming down. We’re beginning to get lines of sight on some interest rate cuts coming later in the summer, maybe after the Fed after the ECB but but still coming. And I think that’ll be a real relief to the UK economy. I do like to say the economy is not stock markets and stock markets and economies. I think the UK stock market has been a little bit better place. I mean, it’s very cheap. It’s very out of favor, but it is still full of these sort of high dividend paying stocks. It’s a very globally focused market. Nearly three quarters of revenues from UK footsie 100 stocks don’t come from the UK. They come from the rest of the world. So if we are going to see a soft landing if we are going to see the rest of the world in recovering, we are going to see lower interest rates that should drive more interest in UK stocks and more interest in these sort of big dividend payers.

James Connor 10:08
So you are based in London, it’s the financial capital of the world. And I’m curious, from just your personal perspective, what’s going on there just in terms of inflation, what’s going on in terms of the real estate market, and also the commercial real estate market?

Ben Laidler 10:22
So yeah, I think you need to sort of split it in, you know, to me, the UK is quite sensitive to high interest rates. Mortgages here tend to be quite short term, 2/3/4 years. They most people obviously have a mortgage debt levels in the UK are quite high. And therefore, it’s been a it’s been a tough environment, both here and in Europe. For for real estate, for for homeowners, property prices have come down a bit. With maybe getting a little bit of a light at the end of the tunnel, you know, now it’s why we’re so focused on the Bank of England, maybe cutting interest rates, you know, over the summer, commercial, real estate’s been much worse than that, obviously, there’s much more structural drivers, you know, here, we’re probably back in the office two, three days a week, not five days a week eToro, we’re based in Canary Wharf, where its Canary Wharf has been particularly hard hit. It’s trying to migrate to a bit of a more mixed use retail and residential, but it’s dominated by, by offices. So you know, particularly hard hit right now, by the commercial real estate issues. I guess, the best I could say is, it’s a slow moving train wreck, you know, most of these commercial real estate loans are, you know, 10 year loans. And so, you know, at least you can see the problems coming. And not everything is not everything needs to repeat at the same time. But it’s, it’s still a very tough environment.

James Connor 11:58
Yes, interesting points. And I’m sure this is something that’s going on in Toronto, New York and every other major city throughout the world. And it’s going to be interesting to see how that unfolds in the coming years. So what about mainland Europe? There’s been lots of chatter about Germany, going into recession, what’s what’s happening there.

Ben Laidler 12:17
So Europe is basically that sort of canary in the global economy coal mine. And Germany’s in recession, the rest of the continent is sort of flirting with recession, a company profits in on the continent are, have been falling pretty heavily. There’s a lot of short term debt, you know, around in Europe, so the continents raise sensitive to these to higher interest rates. But counterintuitively, that’s the bookcase. And that’s why European stocks have actually outperformed the s&p 500, you know, this year, despite all this bad news, because it means that inflation has been very low, two and a half percent in Europe, it means that interest rate cuts will be coming early. We had the Swiss National Bank cutting last week, the first big developed market Central Bank’s cut interest rates, the ECB will follow in June, probably ahead of the Fed. And this hopefully will drive a bit of an a bit of an economic rebound, and especially your profits, rebound, you know, off the back of that. So, yes, Europe’s in a bad place. But markets are forward looking. And you know, we’re looking for those rate cuts, we’re looking for that big profits rebound. And that’s why European stocks have been performing much better this year.

James Connor 13:39
I’m surprised the inflation is only two and a half percent, what is it in London or in Britain?

Ben Laidler 13:45
Well, underlying inflation in the UK right now is about four and a half percent. So that’s nothing like as bad as it used to be. But it’s still the worst in developed markets at this point.

James Connor 13:57
I know every time I travel there, I’m always shocked by the prices. And the same thing. This happens when I go to the US too, because I’m in Toronto. And so right now, of course, we use a currency that there’s always like a 30% premium. Everywhere I go, cup of coffee is costing me eight bucks. So I want to move on now and get your thoughts on Asia and more specifically China. We’re reading a lot about what’s happening in China, and who knows what’s really going on there. But there’s a definite slowdown in the economy, and they’re residential and also commercial real estate. What are your thoughts on China? And are you concerned that China’s troubles might spread to other parts of the world?

Ben Laidler 14:35
So yes and no. So China has plenty of problems. It’s got the highest corporate debt levels of any country, a lot of it focused on the property sector. It has a as a shrinking workforce, you know, at this point, has a simmering trade war with the US, which may well get worse, depending on what happens in the US election in November. But it also has a lot of tools to To deal with this, it has a huge savings rate as capital controls, it has stayed our banks. So it’s very much in control of its own destiny. And from an investor standpoint, you’ve had multi years of stock market underperformance. You have rock bottom valuations, very depressed investor sentiments, and an economy which, yes, it’s struggling, but it’s still growing, and four to 5% growth rates, which is very disappointing by Chinese standards, but is the envy of the rest of the world. And but to your point, it’s, you know, it’s an economic giant, it’s the second biggest economy in the world. It’s the biggest manufacturer in the world, it’s hugely important for an awful lot of sectors and stocks around the world from, you know, luxury to autos, to minors. And it’s also my sort of poster child again, for how economies are not stock markets. The Chinese economy over the last 25 odd years is up nearly 15 fold. So an absolutely economic miracle. But the Chinese stock market, you can basically place a ruler over it for the last 25 years absolutely flat for for various reasons.

James Connor 16:19
That’s it. I didn’t realize that. Why is that?

Ben Laidler 16:23
I think there’s a lot of reasons. So there’s absolutely an overcapacity in China. You know, across industries, they’ve overbuilt, which just means that returns have been pressured lower for, for lots of companies. Corporate Governance, is not the greatest. There’s been a massive IPO boom. So there’s been an awful lot more supply of Chinese stock out there, and maybe, you know, not not so much demand for Chinese stock. So I think there’s been an awful lot of reasons, which has sort of driven this wedge between this booming economy and a stock market, which is absolutely had some good years along the way. But overall, it hasn’t performed very well at all.

James Connor 17:06
So I had a discussion with George Calhoun recently, and he referred to China is what’s happening in China is the Japan application. Okay, so he thinks we’re going to see this continued slowdown in China, and it’s going to take them decades to recover. Do you agree or disagree with that?

Ben Laidler 17:25
I don’t think it’s that bad. China, as I say, has plenty of problems, it’s facing a sort of a bit of a middle income, you know, trap. You know, the, the phrase is, it’s gonna get old before it gets rich. But I do think they have the policy tools, I do think the growth story is not as bad as it looks, I think China will be fine. Again, I but I, that doesn’t necessarily mean you’re going to make an awful lot of money in Chinese stocks.

James Connor 17:55
Ben, you and your firm have written extensively on Bitcoin as an investment class. And given a two job performance, I want to get your thoughts on this, it was up over 160% 2023 And here we are coming up to the end of the q1 in 24. Up 50% Give or take, what are your views on Bitcoin? And where do you see it going in the remainder of 24

Ben Laidler 18:17
I think you’re seeing a classic supply and demand squeeze. So we have these new spot Bitcoin ETFs, which have been running for a couple of months at this point. But already, we’ve seen days where they attract a billion dollars of net inflows, just in one day, we’ve seen now 4% Of all the Bitcoin in existence in the world already in these new ETFs that are very only been around for a couple of months. So that’s on the demand side and on the supply side, there will only ever be 21 million Bitcoin 90% of them are already out there in existence. And the the supply growth for the rest of them is about to have at the fourth annual Bitcoin having which is the four yearly annual Bitcoin IV, which is coming up next month. So classic supply demand squeeze. And there’s more to come. I think the Fed cutting interest rates, you know, Bitcoin doesn’t yield anything. So I think it’s very sensitive to the level of interest rates. So that will help. There’s a bunch of regulations coming or changes coming new accounting rules in the US, which will make it easier for companies to own crypto, very few of them do today, new global banking regulations at the beginning of next year, which make it easier for banks to and crypto, very few of them do today. So I think this momentum is going to continue. And I think the context is also important. Any one of these issues is disproportionately important for Bitcoin or crypto more broadly, given that it’s still by far the smallest of all asset classes. It’s by far the youngest of all asset classes, and it’s completely dominated by retail investors. So we have I think a Hold institutionalisation a story to play out over, over coming years.

James Connor 20:05
Well, so you’re very bullish, and there’s a lot more to come, in your opinion.

Ben Laidler 20:09
You’re putting words in my mouth, but I wouldn’t disagree with much of that.

James Connor 20:14
So Bitcoin is quite often referred to as digital gold or the new gold. So I want to get your thoughts on gold. Now. We’ve had inflation, it was at 40 year, highs, it’s pulled back. But we’ve also had political uncertainty throughout the world and unrest. And that’s the perfect environment for gold. But yet gold just continues to plod along, if you will, right. Maybe it’s up five 10% on the year, but nothing significant. Is gold at dying asset class? And is Bitcoin overtaking gold?

Ben Laidler 20:43
Yeah, I mean, that’s gonna be too rude about gold. I mean, You Made What 14 15% In the last sort of six months or so we’ve seen a new all time high. But yes, it’s absolutely been left in the dust, by Bitcoin by digital gold, there is an increasing sort of generational divide there, which I think has to make you concerned sort of longer term, you know, younger investors, you know, massively prefer crypto and, you know, Bitcoin as their hard asset of choice, rather than, rather than rather than gold and gold, you know, it’s absolutely been helped by it. You know, if you’re, if you’re bullish on gold, it has a more diverse range of buyers, whether that’s central banks, whether that’s jewelry, you know, it’s not just about investors. It also has, you know, more of a track record has been around for millennia. So I wouldn’t count it out. But I would absolutely be more positive, I think, on on digital assets going forward, rather than rather than gold.

James Connor 21:44
And you mentioned earlier that a lot of the Bitcoin buying is coming from retail investors. But what about institutional investors now that these ETFs have been approved by the SEC, and they’re actively trading? Are you getting more interest from institutional investors?

Ben Laidler 21:59
Yes, but I think as a very, very long way to go. I mean, I It’s starting from negligible levels. And I think it’ll be a slow burn, but I think it’ll end up being massively more significant. I mean, institutional investors are, you know, two to three times the size of retail investors. So that’s the size. And as I say, as you get the Bitcoin ETFs, as you get the new accounting regulations for companies, as you get the new regulations for global banks, ultimately, you know, I would also suspect, we’ll see a central banks beginning to buy bitcoin. They’re very big owners of gold today. So I think you have all this to come. And I think it’ll slowly build and I think it’ll be very significant.

James Connor 22:44
So you just touched on central banks, and they have been big buyers of gold, they’re trying to protect their currency reserves of the US dollar, in in 2023, they purchased approximately 25% of all the gold that was produced. And I think they did the same sort of numbers in 2022. And I guess my question to you is, do you think the central banks are creating an artificial gold price? In other words, if they weren’t out there buying it? Would it be at 2000? Or $2,200? an ounce, maybe? Or would it be lower?

Ben Laidler 23:16
So the short answer is it’s low, it would be lower. If you take that demand out of the market, which, you know, it’s nearly a quarter of demand over the last sort of year or so then prices would absolutely, absolutely be lower. I think they’d been buying for different reasons. I think some of them have absolutely seen some relative value, you know, in gold, it hasn’t performed particularly well over the last few years, I think that’s been a relative value opportunity for some of them. And for others, you know, like the Chinese, it’s been a bit more strategic, you know, diversifying away from the dollar and into and into other assets. But, you know, jumping to my earlier point, there are multiple drivers of, you know, the gold price. We have seen investors been pretty lukewarm, we’ve seen outflows from gold ETFs. But we’ve seen a pickup in Central Bank demand, and we’ve seen pretty resilient physical demand from from jewelry. And if maybe we see a weaker dollar going forward, you know, maybe that gets supported, as well as gold becomes cheaper in, you know, in China and India, which are the biggest single buyers of gold out there.

James Connor 24:18
You speak to a lot of institutional investors and retail investors, what do you suggest to investors when it comes to investing in Bitcoin versus gold?

Ben Laidler 24:26
Everything in moderation. I mean, the key to this the only sort of free lunch and finances is diversification. So Bitcoin, obviously, young asset class, very volatile asset class, so, you know, small allocation, but I don’t think you need much, you know, much more than that, given the, you know, given the performance track record, Bitcoin, you know, past performance is not future performance, but you know, 13,000% in since inception. Interestingly, of those 12 or 13 years, it’s been the best performing asset in the world for, I think, eight or nine years. I’m also been the worst performing asset in the world for for the remaining. So I think that just sort of speaks to the volatility. So you need to manage that the way to manage that is diversification. I will prefer Bitcoin over gold. But there’s there’s room for both. And I just I think you need to manage the, you know, keep the position sizes realistic and diversified for both of them. So

James Connor 25:20
true diversification is the key. Then as we wrap up, you are very bullish on the US markets in the US economy. And if there was one risk that could derail your thesis, what would it be

Ben Laidler 25:32
the end of this immaculate so disinflation, we’ve been seeing, as I say, there, there are two pillars to this bull market, the the recovery in earnings, and the interest rate cuts that are coming. And that will not only support the rally, but I think broaden the rally, outside of sort of big tech and this US concentration, we’ve been seeing these sort of more, these cheaper, more interest rate and economically sensitive assets, like Europe, like emerging markets, like real estate, like small caps, you know, really broaden this rally out, reduce that concentration risk. And the threat to that is, is that central banks can’t cut interest rates. And the only way that happens is we have a comeback and inflation. If this we don’t see this productivity boom, if we have a big commodity shock, any of these sort of outlier tail risks reverse this consensus view that inflation will just keep drifting lower, and interest rates will follow.

James Connor 26:32
Yeah, yeah, it’s gonna be interesting to see if you and I are having a conversation in the fall if we’re still looking for these three interest rate cuts.

Ben Laidler 26:38
Absolutely. And you know, it’s not just the Fed. I mean, it’s we’re really looking for for interest rate cuts globally and for this rally to sort of broaden out globally, but yeah, absolutely. The the Fed biggest economy, biggest central bank in the world, they are absolutely key to this.

James Connor 26:55
And Ben, if someone would like to follow you online and read your thoughts, where can they go?

Ben Laidler 27:00
So come visit us at eToro. All the research is up there every day. And I’m also on Twitter @Laidler_Ben I think.

James Connor 27:09
Well, that’s great. I want to thank you very much for spending time with us today and sharing your thoughts. And I’m also going to check out that place, fish and chip place in Scotland the next time I’m there.

Ben Laidler 27:18
Anstruther. Anytime. Thank you.

James Connor 27:21
Well, I hope you enjoyed that conversation with Ben Laidler and it provides you with some guidance on what to expect in the financial markets in the months to come. As we discussed navigating the financial markets and planning for your financial future can be a daunting task. And if you would like help with this process, consider having a discussion with a Wealthion endorsed financial advisor Wealthion.com There’s no obligation to work with any of these advisors is a free service that will feel and provides to all of its viewers. Don’t forget to subscribe to our channel, Wealthion.com and hit that notification button to be kept up to date on upcoming interviews. I want to thank you again for spending time with us today and I look forward to seeing you again soon.