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    On The Tape

    Running On Empty with Tony Dwyer

    Fri Aug 25 2023
    DrivingFamous JacksonsMarket SentimentAI CrazeMeme StocksPrivate CreditFed's Balance SheetDebtInflationRisk MispricingInterest RatesReal America's PerspectiveConsumer CreditMarket OutlookFed's Impact on Market and Private CreditPositive Signs in the MarketMarket VolatilityWall Street Analysts

    Description

    This episode covers various topics including driving, famous Jacksons, market sentiment, AI craze, meme stocks, private credit, Fed's balance sheet, debt, inflation, risk mispricing, interest rates, real America's perspective, consumer credit, market outlook, Fed's impact on market and private credit, positive signs in the market, market volatility, and insights from Wall Street analysts.

    Insights

    Private credit and private equity act as buffers

    Private credit and private equity have acted as buffers for bad bonds and prevent different prices on bonds. They take extra risks due to not having a yield curve.

    Fed's impact on interest rates

    The Fed's rate cuts may not have a significant impact on interest rates determined by the market and banks due to increased regulation and higher cost of capital.

    Real America disagrees with the Fed

    Companies like Nike, Starbucks, and Disney are struggling as consumer discretionary companies, indicating that real America disagrees with the Fed's assessment of the economy.

    Consumer credit and potential slowdown

    Consumer credit drives the consumer-driven economy, but delinquencies and charge-offs are increasing in retailers with private label credit cards. Rising interest rates or job loss may slow down US consumer spending.

    Fed's impact on market and private credit

    Private credit and private equity are new players in the system, replacing regional banks as intermediaries. Leverage going down in the system leads to market moves and blowups in commercial real estate and retail.

    Searching for positive signs in the market

    The speaker is upset about the lack of consequences for government programs in 2008 and struggles to find positive signs in the market. Opportunities may exist in stocks that have hedged correctly and with dropping mortgage rates.

    Market volatility and investment opportunities

    Volatility and risk assets will impact equity markets. The Fed's quick actions during economic crises create investment opportunities.

    Wall Street analysts' lack of boldness

    Wall Street focuses on being right or wrong at a point in time, lacking boldness and courage. The recent drop in Nvidia's stock presents an epic opportunity for sell-side analysts.

    Chapters

    1. Driving and Famous Jacksons
    2. Market Sentiment and AI Craze
    3. Meme Stocks and Market Conditions
    4. Private Credit and Fed's Balance Sheet
    5. Debt, Inflation, and Risk Mispricing
    6. Fed's Impact on Interest Rates and Market
    7. Real America's Perspective and Consumer Credit
    8. Market Outlook and Risks
    9. Fed's Impact on Market and Private Credit
    10. Searching for Positive Signs in the Market
    11. Market Volatility and Insights
    12. Wall Street Analysts and Market Insights
    Summary
    Transcript

    Driving and Famous Jacksons

    00:01 - 06:15

    • The podcast begins with a discussion about driving into the studio and listening to music.
    • The hosts talk about famous people with the last name Jackson, including Janet Jackson and Stonewall Jackson.

    Market Sentiment and AI Craze

    00:01 - 06:15

    • They introduce Tony Dwyer, Chief Market Strategist at Canacord Genuity.
    • The hosts mention that all the geniuses will be at Jackson Hole, Wyoming.
    • They discuss the convergence of roads and bearish sentiment in the market.
    • Danny Moses compares the AI craze to the fiber optic craze of 1999-2000.
    • He shares a story about JDS Uniface's stock getting killed in the aftermarket during that time.
    • Danny predicts that stocks are running out of buyers and expects a market correction similar to July 2000.
    • He also mentions closing the chapter on meme stocks like AMC and GameStop.

    Meme Stocks and Market Conditions

    05:53 - 11:46

    • AMC and GameStop investors believed the market was rigged.
    • Fundamentals matter in the stock market.
    • Tesla is considered a meme stock that doesn't trade on fundamentals.
    • Sentiment is important in the market.
    • There are similarities between past market crashes and the current situation.
    • Interest rates are rising, which could impact the market negatively.
    • Private credit has acted as a buffer during this cycle.

    Private Credit and Fed's Balance Sheet

    11:21 - 17:24

    • Private credit and private equity have acted as buffers for bad bonds, preventing a different price on bonds.
    • The Fed's balance sheet still has $8.4 trillion left, mostly in treasuries, which is keeping interest rates higher.
    • Quantitative tightening has caused mortgage spreads to widen due to the Fed no longer being the biggest buyer of mortgages.
    • If the economy starts to decline, the Fed is expected to be aggressive in easing.
    • The yield curve inversion doesn't necessarily mean a recession is imminent; it could take time for it to happen.
    • Inflationary pressures may complicate the Fed's decision to cut rates again.

    Debt, Inflation, and Risk Mispricing

    17:05 - 22:25

    • For the people you mentioned, none of them had to contend with inflation. There were no inflationary pressures whatsoever.
    • If the Fed were to start cutting again, the inflation they're trying to combat is going to come back with an effing vengeance.
    • The amount of debt that exists now is a generational high in debt to GDP.
    • Private credit and private equity guys don't have a yield curve. They get paid to take the money, so they can take a little extra risk.
    • The banks aren't participating as they used to in providing liquidity due to regulatory requirements and capital ratios.
    • The Fed will likely stop quantitative tightening and change the ratios for banks so they can hold treasuries with lower capital requirements.
    • You can't be printing money with our debt and inflation out there.
    • When Janet Yellen announced an increase in fixed income new issuance in Treasury, bond markets started going back up in yield.
    • The interest expense on government debt is about 14% of what the government pays, which is almost a 42% year-over-year gain.
    • This situation is not natural because global central banks print money, creating something out of nothing.
    • Risk is still mispriced in the market due to unnatural cycles caused by central bank actions.

    Fed's Impact on Interest Rates and Market

    22:02 - 28:01

    • The Fed's rate cuts may not have a significant impact on interest rates determined by the market and banks due to increased regulation and higher cost of capital.
    • The balance sheet expansion resulting from quantitative easing can lead to inflation and an increase in unemployment rates.
    • Lowering rates by the Fed could potentially attract new buyers of mortgage paper, leading to a decrease in mortgage rates and an increase in activity.
    • However, rising cap rates may cause rents to go up, making it difficult for people to afford owning a home.
    • Keeping rates high for longer periods can result in delinquency rates going up for corporations and households.
    • Japan has been selling treasuries for the past ten years, causing their bond yields to rise and weakening the yen.
    • Many stocks have been significantly affected, with over 50% of S&P stocks down more than 20% from their 52-week highs.
    • Disney, Starbucks, and Nike are struggling as consumer discretionary companies, indicating that real America disagrees with the Fed's assessment of the economy.

    Real America's Perspective and Consumer Credit

    27:37 - 33:16

    • Nike's performance suggests that the Fed's view of the consumer discretionary sector may be wrong.
    • Real America is indicating that the data doesn't support the Fed's perspective.
    • Despite recent concerns, the results and guidance from major companies like Nike, Starbucks, and Disney have not been as bad as expected.
    • Investors in these companies are speaking with their wallets, which has a significant impact on the stock market.
    • China plays a crucial role for these companies, and its economic situation is being overlooked amidst focus on domestic issues.
    • The real estate market in China is experiencing difficulties, affecting companies that build communities to uplift people from poverty into the middle class.
    • This situation has led to bankruptcies and declining asset values, creating an unvirtuous cycle.
    • Consumer credit is a key factor to watch as it drives the consumer-driven economy. Delinquencies and charge-offs are increasing in retailers with private label credit cards.
    • The US consumer may slow down spending due to factors such as rising interest rates or job loss.
    • The Federal Reserve's ability to control unemployment rate may be limited, leading to potential cascading effects if it spirals out of control.
    • When good news becomes bad news due to Fed actions, it may be time to sell. Conversely, when bad news becomes bad news due to unemployment spikes, it could present a buying opportunity.

    Market Outlook and Risks

    32:50 - 39:37

    • Inflation is not a problem, employment is the problem that creates a buying opportunity
    • Event contracts from CME Group offer a new way to trade futures markets
    • iConnections is a platform for asset managers and allocators in alternative investments
    • Positive sectors include small, mid, and large caps
    • Consensus estimate for S&P operating earnings is $245 next year
    • Taking risks at historically high multiples may not be worth it
    • Having a large portion of the portfolio in just a few stocks is not advisable
    • If unemployment spikes, the Fed will get more aggressive quickly
    • When weakness comes, attack and buy stocks
    • Lower corporate yields, mortgage rates, and easing by the Fed would improve outlook for money

    Fed's Impact on Market and Private Credit

    39:18 - 45:01

    • Bullish call is that things have to get so bad that the Fed will cut 100 basis points
    • Fed Fund Futures show an increase in the chance of another rate hike
    • Market going down or up by 10% won't change the opinion if three things don't get fixed
    • The Fed put comes in the form of unemployment rate or credit event
    • Every recession has a credit event, and there's always something new in each cycle
    • Private credit and private equity are new players in the system
    • Transfer from regional banks to less regulated players buying distressed assets
    • Number of public companies has decreased while private equity funded companies have increased significantly
    • Banks are no longer here to provide a buffer, private credit is different than having banks as intermediaries
    • Leverage is going down in the system, which leads to market moves and blowups in commercial real estate and retail

    Searching for Positive Signs in the Market

    44:33 - 50:04

    • The speaker is upset about the lack of consequences for government programs in 2008
    • They are searching for positive signs in the market but struggling to find them
    • There may be opportunities in stocks that have hedged correctly and with mortgage rates dropping
    • John Butters predicts a consensus of $245 for next year, while the speaker's estimate is $220
    • The stock market is currently discounting a reduction in inflation and full employment
    • The speaker mentions a show on Apple Plus called 'Hijack, Dangerous Alba'
    • In the summer of '08, there was optimism before the market crashed
    • The speaker asks for positive input but feels depressed about the current state of the market
    • Nvidia's stock has been volatile during this period
    • Leadership in the market has been lost
    • Jerome Powell's comments may impact the market

    Market Volatility and Insights

    49:42 - 55:04

    • One of those periods where volatility and risk assets will impact equity markets.
    • Market call on SiriusXM Business Radio with Guy and Liz Young on Monday at noon Eastern time.
    • On the Tape podcast drop featuring Chad Anderson, author of Space Economy.
    • A giveaway for the book Space Economy for the first 100 people to leave a review for On the Tape and OK Computer podcasts.
    • Vibe check reveals a sense of validation and opportunity in current market conditions.
    • Don't let being down money in a stock prevent you from selling it based on opportunity cost perspective.
    • The Fed's quick actions during economic crises create investment opportunities.
    • Tony Dwyer's insights are highly regarded above all the noise in the market.

    Wall Street Analysts and Market Insights

    54:42 - 57:41

    • Wall Street has become made for TV and focuses on being right or wrong at a point in time.
    • There is a lack of boldness and courage among analysts on Wall Street.
    • The recent drop in Nvidia's stock presents an epic opportunity for sell-side analysts.
    • The podcast hosts aim to provide helpful insights and good input to their audience.
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