Market Tumbles On Rosy Jobs Data | Jack & Max Break-Down Non-Farm Payroll (NFP) Sell-Off and Current Macro Regime
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Very happy to welcome to Monetary Matters once again, my friend, business partner, and host of the Other People's Money podcast, Max Weethy. How are you doing, Max? I'm doing well, Jack. It's been an eventful Friday. We got nonfarm payrolls this morning, inflation expectations. Clearly, both of those moved markets with

Equity markets down, bond markets as well sold off. And I know that we've pulled back down, but the 30-year touched over 5%. Definitely an important mental line in the sand for many. What was your take on the NFP this morning?

Well, let's see. How many was it? 256,000 jobs added for the month of December, blew past the expectations of 164,000. So yet another hot jobs report. And interestingly, Max, a lot of people say nonfarm payrolls, which is

the jobs number is overstated for reasons we could get into the employment level, which is from the household report, not the establishment survey that smashed expectations too. And Max, we had a huge drop in the unemployment rate from 4.24% to 4.08%. So people say, Oh, it's 4.2% to 4.1% looking at only the tens digit, not looking at the hundredth digit, which is so short. So, I mean, the unemployment rate is one of the most important,

macroeconomic pieces of data. I mean, that's like saying, oh, the S&P is at 61, as opposed to saying, is that 61? Is it 61.20? Is it 61.95? These things matter. So the fact that, you know, people are not reporting the hundredth digits is kind of ridiculous to me. So that's a 16 basis point drop in the unemployment rate. Huge. So this is a yet another nail in the coffin. Sorry for the dramatic language for the recession. People have been expecting a recession. They've been wrong for three years now, Max. It so far appears that they continue to be wrong.

There will be in one month, in the next month's jobs report, an important wrinkle that could, and I apologize, could be the saving grace for the unfortunate argument that there would be a recession based on a job, sort of a wrinkle in the data. But Max, it was an excellent, stellar jobs report.

for the actual real economy, what really matters for the stock market, as we reported today, with less than about a half hour of trading, the S&P is down 150 basis points, 1.5%. So some pain in the market, but what was the S&P up last year? 25%. If the equity longs can't handle it, and we own stocks, right? Then they're babies. But Max, it seems to me

The stock market is down much more than I would have thought it means to me. And I will sort of flagellate myself. The last time we spoke, Max, I shared my own opinion that

based on my read, the threat to the markets and to the economy was by far recession, not inflation. I haven't expected a recession for over, I haven't been a recessionista for well over 18 months, but I think that in terms of what is a greater threat, recession or inflation, it really is one of those two things. It's recession. I've been of the view that inflation has been whipped, but it's clear the market disagrees with me.

Max. Well, and the consumers disagree with you. So we got the Michigan consumer inflation expectation surveys. They do a one year and a five year. They both came in at 3.3%. A big jump from 2.8% was the one year expectation. That jumped all the way to 3.3%. And

The five-year expectation was 3%, so that jumped up as well. So potentially that is another thing that spook markets is clearly people are still worried about inflation, despite what the central bankers might be telling us that it is in fact whipped.

Yes. And Max, as bad of a track record as the nerds, the eggheads, the economists at the Federal Reserve, at the big banks, independent economists, as bad as their track record is, Max, of forecasting inflation, I would say that Joe on the street, Joe six-pack,

also does not have a good track record. So I think it's hard to do. For example, the previous high in inflation expectations was July 2008, which, okay, the price of oil is, gas is expensive, super expensive, I get it. But of course, one month later, you had the collapse of Lehman Brothers and a decade of very low inflation, so low in fact, the Federal Reserve is trying to target inflation to get it up. Now, of course, they're trying to get it down. So I think

whether you're living your life as a regular citizen or you're an economist, inflation is hard to predict. And of course, I include myself in that. Yeah. And now one market in particular is taking things hard. And you mentioned like 1.5% on the S&P. I don't know where the Russell is, but at points in time today, it was 100 basis points down beyond the S&P 500. Obviously, if your takeaway from this is that we're not headed into a recession and thus the Fed is unlikely to cut rates,

You know, there's obviously more rate sensitive companies there with the high unprofitability of that index and the degree to which they rely on capital markets to fund continuing operations. What was your take on this extreme underperformance from the Russell today?

So Russell down 2.35% of a lot more than the S&P. Max, my bias is towards fundamentals. I want fundamentals and reality to drive markets. But the reality is that reality does not drive markets. And it is so much, 80% or more, a narrative game. Max, I'm old enough to remember in the way ancient days of 2021, when...

high interest rates were bad, not for the Russell, but they were bad for the Nasdaq. They were bad for Nvidia, Apple, Tesla. Why? Because the higher long-term interest rates are, the higher the discount rate is, the higher the rate by which you have to discount future earnings for growth companies. And Nvidia is a growth company. A lot of its profit is

was it was in the future. So high interest rates are supposed to be bad for Nvidia. And now,

high interest rates are actually good for Nvidia. Why is that narrative changed? Because Nvidia and all the tech stocks have rallied like crazy while interest rates have gone up. And the correlation has changed. The regime has changed. Now, the Russell has sold off. Russell has been very weak as interest rates have risen. So now the narrative has changed to, well, actually, high interest rates, they don't affect Nvidia because they have these solid balance sheets. Apple's got, what, $50, $100 billion in cash.

And so they're not net borrowers, but the Russell, those small cap companies, they're the ones who are borrowing from banks at short term floating rate interest rates, whether it's from banks or private credit, CLOs, whatever. They're borrowing in the floating rate market. So the high interest rates are squeezing them. And I think that there is an aspect to that high interest rates are impacting the Russells.

economic reality they are a net borrower much more than apple is apple is a net creditor it has a you know way more cash than it has borrowed i believe and so many other companies in the s p 500 as well but that reality is not why uh the narrative is out there the narrative is out there because the russell's been selling off uh as interest rates have risen so that i think people should be aware of the reality aware of the narrative and yeah i mean max fundamentally like do i believe you know

Palantir, which is a growth company, it's grown its revenues, not grown its revenues nearly as much as Nvidia or some other companies. That stock is very, very expensive on a price to sales basis, on a price to earnings basis.

And that happened while interest rates have shot up. I don't know what Palantir is up today, but according to the logic of 2021, Palantir is only down 1.89% today. So we now are in a regime of high interest rates are bad for the Russell. Whether that's true or not,

Doesn't matter. I'm talking about strict trading. You correctly assessed that the reason is usually about what precedes this moment in time. And in 2020, prior to 2021 and 22, where the rising rate environment was going to be bad for tech stocks,

the belief was that you needed to be in tech stocks because there was going to be no yield anywhere. Interest rates were at zero, there was no yield whatsoever. And so the flows had gone into these growth stocks because that was the only game in town. And so that has obviously flipped because we have been able to earn a yield from fixed income instruments.

And so the question is, you know, what has been happening over the last year that is causing asset prices to rise? And clearly the thing that has been causing asset prices to rise for a lot of people has been the expect. I mean, obviously there has been earnings growth. You talked about the earnings growth that came from Nvidia and came from Palantir, but a lot of it also has come from the belief that Trump is going to win and that's going to be good for markets. The belief that, that,

the economy is going to slow down, inflation is going to be whipped, and thus rates are going to come down. Well, we have questions about whether rates are going to come down. We have questions about whether Trump is actually going to be good for markets as he seems to be standing his ground on a lot of the policies that people highlight as being potentially negative for markets and pushing inflation higher. And so there is, I think,

As much as the narrative has flipped, there is a straight line that can be drawn between the narratives that drove the flows up to this point and why things are reversing.

Yes. And my macroeconomic view continues to be that the threat to the economy is much more likely to be recession than inflation. However, the market very clearly disagrees with me. So, you know, this is a show that most of the views are probably going to be over the next week. So it's going to be a short term view.

The market clearly is much more worried about inflation because a blowout jobs number, a good jobs number is bad for the stock market. And so I think on a short term basis, yeah, I'd say yes.

I'm still, I think markets could go down. I mean, I'm a long-term investor and I encourage, you know, viewers to have my more long-term view. But on a short-term basis, I still think, yeah, it feels like it could go down a little bit more, doesn't it?

What do you think, Max? Yeah, I agree. And you astutely before our last conversation, you pointed out that people were a little bit offsides heading into the big Fed day. Markets sold off. I think the

biggest, if the biggest or second biggest sell-off of the year, almost 3%. And in that conversation we had, we said, you know, we think that there could be a little bit of follow-through. Now we're only slightly below the level that we were at, you know, after that big 3% sell-off. We did see a little bit of a rally, you know, compared to that low level, but we're now below that. So, you know, the follow-through was not immediate in the terms of like a big waterfall.

But clearly, the animal spirits which drove the market through most of 2024 have not quite returned, despite some of the big upside vol days that we've had. Yeah. I mean, the market seems a little bit long in the tooth, the rally. I feel like the stocks that are going up is getting narrower and narrower and narrower. And

I think that the large cap stocks that have really fueled the rally are also looking

a little bit weak as well. It's kind of weird because I think a lot of economically sensitive stocks, like the financials, for example, this report should be really good for financials. If people have a job, guess what they do? They pay off their loans. That's good for financials. However, the market's kind of in the too clever by half mode where it thinks that if the job market is so good, interest rates are going to go up, which they did. Excuse me, I don't mean short-term interest rates. I mean

Longer term interest rates, the two-year, the 10-year, the 30-year, which are expectations of forward rates. And let's see. So the two-year went up 13 basis points. It's now at 4.40%. The 10-year went up 10 basis points, so 4.78%. The 10-year is now the highest it's been since, I think, November 2023.

It's at a key level. I mean, I'll just throw... I think there's two levels of view. There's a view where you're confident enough to say it on a podcast. And then there's a view of actually willing to put on a position. The level two is a much higher threshold. So I'm at a level one conviction of the two. So I've not implemented this view, but I'll say, we're on a podcast, I'll say it now. I think the tenure is looking attractive now. And I think that...

I don't think that, you know, I'm not really concerned about the 10 year going to 6%. I'm not really worried about fiscal crisis. I am not worried. I think that the 10 year relative to cash relative to inflation is more attractive than it's been in a really long time, with the possible exception of like October to early November 2023.

What do you think about my bond call? You sent me, I mean, you sent me the chart of the earnings yield of the S&P 500 compared to the 10-year and that it is now lower than the yield on the 10-year for the first time in decades. Now, granted, this level that we have reached is not the bottom of that chart, and we will put that up. It can go much lower, but

you know, at least on that sort of fundamental valuation standpoint, which you've already highlighted, doesn't really seem to matter to the market. It does look like an interesting buy. And I think about it also in terms of inflation expectations. You know, we saw a very big rise in the consumer inflation expectation surveys today from 2.5% to 3.3%. I mean, that's a pretty big rise. And I think to

Thinking about rates of change, like, are we going to have another kick up in inflation expectations that is that big? I think that that's probably unlikely to happen. Now, the one thing that has been moving today that has been green and has been green really for a couple of weeks now has been oil. So oil is approaching almost 80 bucks a barrel.

That does affect consumer inflation expectations quite a bit. And that is continuing to move up. And it's done so rather sleepily with the performance of the equity market last year. I mean, oil and commodity prices really dominated for a long time in 22 and 23 when the question was, are we going to get runaway inflation? How fast is inflation going to cool? And

And oil was really range bound. Nobody was talking about it and people weren't really paying attention and it has sleepily crept up. I don't know, you know, I didn't fill out the Michigan inflation expectation survey and I don't drive, so it wouldn't be affecting my inflation, you know, expectations as a consumer. But that's certainly something to pay attention to, you know,

four potential downside to bonds. I think I tend to agree with you just like on a technical exhaustion level and on a fundamental relative value point, but that hasn't really seemed to matter to anybody so far.

So you're right. Max oil has crept up steadily. I didn't know the extent to, to which it had credit crept up. So, uh, WTI is now at 75 bucks. So Brent probably a little bit higher than that. I will say, Max, it is still within the range. Like, uh, since the, you know, after 2022, it's been a range as high as $90 and as low as $67. So 75 is still within that range. Uh,

I don't think that's much of a breakout. And I mean, inflation expectations are, they're higher now than they were in 2023 when the price of oil was at 90 bucks. Yeah, it's interesting that the consumer inflations are so high. I know the Federal Reserve,

pays attention to them. They also pay attention to the inflation expectations baked into markets. I have a suspicion they pay more attention to the Michigan one. I don't think the inflation expectations have any accuracy whatsoever. They probably tell you what happened yesterday. So if inflation goes to 9%, inflation expectations go higher, but that doesn't

It's not predictive. In the same way, you turn on the TV and someone says, after your stocks are up 60%, they say, I'm bullish. Well, thanks. What's helpful is if they can tell you before the 60% rise or at least at the beginning. But it is a self-fulfilling prophecy. If everyone expects inflation, they will spend money and they will accelerate their spending and

because in an inflationary world, you want to spend money and invest money and do anything with your money other than have it sit in a bank account, earning low yields or no yields. So it can be a self-fulfilling prophecy. And then if inflation expectations are higher, people demand a higher wage and the like. So the Federal Reserve pays attention to it. One thing we haven't talked about, Max, is the Federal Reserve minutes.

you know, I read them. They came out on Wednesday. It's interesting to me how many FOMC Federal Reserve participants

basically think inflation is beaten. They're not going to put it like that, but that's my interpretation. And yet they're not willing to cut. So again, I think the Federal Reserve is holding interest rates higher and is less prepared to cut than the economic data indicates. But I'm well aware, like everyone else, even if they're an economist and they appear on Bloomberg,

your opinion does not matter the federal reserve is going to do what it does so i'm i'm very uh willing to um uh

basically acknowledge that my opinion doesn't matter. And I'm not going to make any trade, you know, to say, oh, the Fed Reserve is making a mistake. I'm going to, the Fed Reserve should do what I think. And I'm going to make a trade based on that is a recipe to lose money. So, but that is my own view. I want to switch a little bit up to, to the correlations that we're seeing in markets. It's always a big discussion, how our stocks and bonds correlated. At least today, we had them both selling off together on positive expectations.

economic data. So Jack, how have stocks and bonds been correlated? Is today an outlier or is it more of the same?

Today, stocks and bonds sold off, and it smells and feels a lot like '22 when bonds would sell off and stocks would sell off alongside them, which for most of people watching this career, especially people in finance, stocks and bonds have had a negative correlation. When the stock market sells off on bad economic news, bonds are rallying. So they are a ballast in a portfolio, they are a positive carry put, they are a natural hedge.

One thing that has alarmed market participants since 2022 is the fact that stocks and bonds have been more positively correlated, particularly in 2022. Bonds would sell off, stocks would sell off, stocks would sell off, bonds would sell off.

Bonds would rise, stocks would rise. That actually is kind of has been the norm. I believe pre-1997, stocks and bonds were positively correlated. This negative correlation thing has only really presented itself for a sustained period after 1997. I think that

So today, stocks and bonds sold off today, leading a lot of journalists and market participants to write how this is alarming. But actually, stocks and bonds have been positively correlated for most of 2023. If you look at the 90-day correlation of one-day returns, and perhaps we can put this chart up,

for most of 2023 and most of 2022, and most of 2024, that 90-day correlation has been positive. And it actually only dipped negative. So now it's re-emerging as negative. So I think...

I think that the correlation will go negative again. And I think that bonds will be there to protect. I think that the threat to that we sell off again is a recession in my view. And therefore in a recession, what do bonds do? Of course they rally, yields go down.

I mean, that's happened most of the time. Perhaps I could be wrong about that. If I'm wrong, then inflation is the threat. The bonds and stocks will sell off together. Of course, the Goldilocks scenario is that we neither enter a recession and we don't... Inflation either...

inflation continues to go back down, allowing the Federal Reserve to cut interest rates. That will be a Goldilocks environment and stocks, I imagine, do well or at least do okay there. But I like taking a little bit more data driven view on this. Also, we have

in the correlation between bonds and gold and the correlation between treasury inflation protected securities, so real rates and gold. Today, Max, you want to share the observation you had with me about gold and bonds?

Yeah. I mean, usually on a day when bonds are selling off, gold is not doing as well. It's considered to be, there's no cash flows from gold. And so if you're going to get a better price on bonds, gold is going to struggle on those days. Now, it is not just about the

yield, the nominal yield. It's about the real yield on those bonds. And we did see, obviously, inflation expectations move up and it is lumpier than, say,

Treasury yields because those trade every day versus the surveys that we only get every month. But, you know, the one year inflation expectations moving up from 2.8% to 3.3%, that's 50 bps. That's quite a big move. So you would say that the real yields, despite the fact that bonds are

bonds sold off and yields moved up, they actually went down. So that is sort of somewhat in line with the idea, the traditional idea of what drives the price of gold. Um, so it was, you know, just puzzling at first when you, when you look and you see bonds are selling, bonds are selling off to see gold rallying as much as it has today. But then when you put it in the context of us also getting this update on inflation expectations, it makes a little bit more sense. Um,

You actually ran the numbers. I'm just talking about what is the common perception of what drives the price of gold relative to bonds. But what did the data tell us? Well, the 90-day correlation of the BlackRock TIPS ETF and gold or the gold ETF GLD, the 90-day correlation of one-day returns has been positive for 10 years now, since 11 years, since 2014. And that's the...

The quants would approve of that. I think that is a quantitative researcher's approved version. So that suggests what you're saying. I like to do it.

you know, in a slightly alternative way. So I, number one, I went back to 2005 instead of 2014. And I looked at the, what actually happens? Okay. Let's say the TIPS ETF is down. What happens to gold? The TIPS ETF is down over five basis points. What happens to gold? The TIPS ETF is down over 30 basis point. What happens to gold? And let's see, let's see what we got here. On, let's see, on days where the TIPS ETF is down five basis points or more,

Only gold rallied 700, gold rallied 750 days out of 1900 examples. So gold was down 1150 times out of 1900 examples. So on the margin, it indicates that you're right, but that it doesn't mean, you know,

you know, there are a lot of counter examples. So the correlation, you have to run it, you know, over 90 days for that correlation to show. And you can't like look at it at one day where real yields go up, meaning tips sell off. The tip CTF is down 42 basis points today and gold is up. I think you can't be like, the correlation regime has changed. You've got to wait. Yeah, yeah, certainly. I mean, I guess my question is for...

So what it means for the price of gold moving forward, I mean, if we think about a world where, as I said before, I think it's going to be very difficult, barring some sort of extreme moves in commodity prices for as much as inflation expectations did move up for that momentum to continue.

So in a world where, yes, maybe inflation isn't whipped, the economy is strong and rates are not coming down, I'm not sure how many more of these surprise upward moves and inflation expectations we're going to get. And thus, that even though gold has rallied today, that rally, I think, might be short-lived.

Yeah, I think as a trader, generally gold goes up when real rates go down, i.e. when TIPS, Treasury Inflation Protection Securities, rally. But the reason things go up is because more people buy. I think the reason gold has gone up is because

China, Chinese central bank, but in particular, Chinese citizens have been buying gold. The gold priced in Chinese yuan or Japanese yen has absolutely skyrocketed. I don't think it's the American precious metal speculator. I think it is the Asian precious metal speculator. And I don't include the People's Bank of China in there, who has been buying a lot of gold. Max, gold was kind of selling off and moving in the opposite direction of real interest rates from

2020 to 2023. I think during 2022 and 2023, I think the Russian has been selling a lot of gold. Now, you're not gonna see that from any Russian newswire. You're not gonna see that from Bloomberg, but I just pulled up like the Russian gold reserves and it's been flat since 2020. Russia is a huge producer of gold. So if reserves are flat, they must be a net seller. Now, you're not gonna, you know, the people who love gold

and are not, they're like, no, Russia's not selling gold, but I think they are. And that's why gold traded so poorly. And that's why, you know, now China's buying it and it's trading better. So I think, yeah, you got to look at who's going to be the next buyer as opposed to looking at correlations. So Jack, you talked earlier about conviction, the two levels of conviction for you, conviction enough to say it on a podcast, conviction enough to put it into a trade. What are your closing views? And could you add that, yeah,

that important clarification as to whether this is something you're willing to put your name on or something you're willing to put your money on? That's a great question, Max. The most hackish thing to do in financial punditry is to say, long-term, I'm bullish, but short-term, I've got some concerns. That's a way, if you're a strategist at the Bank of America or JPMorgan, you get to keep your job. You say, I have some jobs, but of course, the clients don't leave, stay in because there's lots of opportunity, but I have some concerns.

So it's a natural hedge and it's a way to basically talk out of both sides of your mouth. And regardless of what happens, you kind of get to look right. So that being said, I do think the market on a short term basis is on some shaky ground.

I think valuations are elevated. We are aware that the correlations between valuations and near-term performance of stock markets is very, very not predictive at all. So for example, what a Bloomberg opinion piece called the vanishing equity risk premium

I have quibbled with how they measure that. We can get into that a little bit later. But it's basically the S&P earnings yield is now lower than the 10-year treasury yield. So stocks are supposed to be riskier than bonds, right? So they should trade at a premium. So based on that, they're not cheap. However, you look at... They are basically where the equity risk premium was negative from 1996 to...

2002. From 1996 to 2000 or 1999, you had a giant bull market, probably a bull market way bigger than the 1920s. One of the biggest bull markets in history. So it is not a good near-term predictor, but I do think valuation is important and that people should be aware of it. So that bearish talking point out of my mouth now, which I know it's a talking point, but I believe it. I also think that

I disagree with the claim that markets are in a speculative frenzy. I look at the companies that have rallied so much. Nvidia, Apple, Chipotle, Wingstop. I think the excellent companies which are growing rapidly in the case of Nvidia or have a huge moat in the case of FICO, for example, they are trading at a supreme valuation. FICO, I don't actually think Nvidia is that...

Like, like Nvidia, I've made this point. Nvidia is cheaper than Chipotle.

Chipotle didn't triple its revenue in 2023. Okay. But obviously semiconductors are cyclical. But I'm not seeing, Max, all of these companies go public, whether they're through an initial public offering or through a SPAC or a reverse merger with an IPO, a blank check company. I was bearish in late 2021. Max, we had a front row seat to the speculative orgy of 2021.

And you had companies that barely existed going public with no revenue, a hope and a dream and a prayer. And to me and you and Max, maybe you and I lean on the more cynical side. So maybe we have this bias, but to us, they were bullshit artists and they ended up being bullshit artists. And, you know, I shorted a few of those companies and most of those companies no longer exist. They were delisted. I don't like, I haven't shorted a company for real since,

2022, I mean, maybe I made it short of the index short in 2023 or something, but I'm not finding those companies, Max. I mean, Carvana looks overpriced to me and Hindenburg had a, excuse me, Hindenburg activist short seller we both have a tremendous amount of respect for. He put out a

Short report on Carvana. I was unaware the degree to which Ally Financial, a bank which most of their loans are in the auto lending space, was buying subprime loans for Carvana. I know

And I read Ally's financials every quarter. I was surprised that I didn't know that. I think the auto... But Carvana is overpriced, and I think Carvana will cease going up. I can say I'm bearish on Carvana. I have a token short of Carvana. It's not in any size whatsoever. It's psychological. It's your biggest psychological short. I'm short one share of Carvana, and we'll see. But...

MicroStrategy. Okay. MicroStrategy, Carvana. I can name a few other companies that are truly speculative companies where I'm not a believer. I'm not a believer and I think that they are likely to go down. But there aren't hundreds of Carvanhas that have gone public that are on CNBC and are basically saying we're going to grow and we're the future. And if you don't buy this stock right now...

Palantir. Palantir is another example. I think you're beginning to see the buds form, but we are not in a speculative excess.

I remember actually a clip of Jim Cramer on Mad Money. He has a segment I actually like when people call in and they ask him about stocks. What do you think about Royal Caribbean Cruise? Jim says, "Oh, well, I like the stock. I like the CEO. A little bit of concern. Actually, you should be in Norwegian instead. We at the Investing Club are in Norwegian instead."

I like it. I remember in 2021, someone asked Jim Cramer about a SPAC. Actually, Max, you know this SPAC. What is the SPAC of the electric vehicle company that was on Xero's? Carson Block actually shorted it. It wasn't FFIE. It was the other one where they're like, we're doing some advanced fleet trucking. It was some bullshit thing. XL Fleet. Yeah.

XL Fleet. Someone asked Jim Cramer about XL Fleet, and Jim Cramer, to his credit, said, that sounds speculative to me. I wouldn't mess around with XL Fleet, but you do you, King, basically. And XL Fleet, I don't know if it's delisted, but it's, you know.

is shadowed down 98%, 99%. People can do that math on their own. I'm not seeing the XL fleets that recently went public that are trash garbage scams, basically. I'm not seeing promoters, maybe perhaps people in the venture capital industry who basically scam their audience and take their trash companies that have been a huge bubble in VC and dump them on their unsuspecting retail followers.

I'm maybe we're seeing the tiny little, little bit of beginnings of that, but we are not deep in that cycle. And so for that reason on a medium, you know, let's say a one year time horizon, it's hard for me to get as bearish as it was in 2021 and 2022. I also think like, let's say equities are 20% overvalued. I'll get into a second why I think the equity risk premium, the way Bloomberg measured it is not the way Bloomberg measured it. The way this Bloomberg opinion piece measured it is, um,

a little bit shallow, but equities are overvalued relative to cash. They're overvalued relative to the 10-year. They're overvalued relative to the S&P historical basis. They're not, I don't think they're overvalued relative to high-yield credit spreads or investment-grade credit spreads. But let's say equities are 20% overvalued. Where did I get that number? I've

I pulled it out of somewhere. So a nice way for that to correct would be for earnings to rise 10% in a year, and then the S&P to sell off 10% in one year. That would be beautiful, and then equities could be at fair value, and then that would make me happy. But markets rarely move in a straight line, and you could have a much more severe

correction. But yeah, I think I'm not terribly bullish in Q1 and Q2. I have been lightening my bag, so to speak, in risk assets, both in stocks and crypto. A lot of that has to do with my own personal needs and the fact that, Max, you and I started a business and are no longer receiving money every two weeks, which is definitely a psychological change. I remember an interview with

David Rubenstein, he's been a guest of mine on my old show Forward Guidance, interviewing Jay Powell, who hopefully will be a guest sometime over the next 10 years. And David Rubenstein was like, so how much money do you make? I forget how much the Fed chair makes, like 175 grand or something. Definitely less than those two gentlemen are used to making. And even though it's well, well in excess of the American salary, he's like, so how do you fund your lifestyle? Do you just sell assets?

And Jay Powell was like, "Yes." And so I think I and perhaps you are in that mode. And it's really important, Max, that it's about you. So much of CNBC and Bloomberg, the strategists, they're talking about their own view. Some of their clients are 70-year-old multimillionaires. They have drastically different needs than someone who's 20 and wants to be in the market. If someone is 20 and they have a job and they're saving, and that's really good, the

the market could be 50% overvalued. And if they have $2,000 in the stock market, they should not be selling. It doesn't matter. You should be drawing that out when you're 60, when you're 70. There are a lot of hedge funds, Max, as you know, who they target volatility. Their clients

whether they're Harvard, Yale, or another fund, let's say Millennium, they target volatility insanely. They're like, I don't want to draw down a bigger than 2%. And the S&P almost sold off 2% today. So they demand extremely, extremely low amounts of volatility. And to have a 10% year with low volatility is extremely good. Now, that may be good for an 80-year-old multimillionaire or for Harvard Endowment. But the 20-year-old who's just starting to invest...

they don't need that volatility. A 30-year-old, a 40-year-old, I mean, it only really matters if you have to withdraw money to fund your lifestyle, like if you have to start a business, which we have done. So I think it's about your personal needs. I don't like talking about personal finance. It's kind of boring, but people should be aware it's about your personal needs first.

And let's say, okay, oh, Jack Farley, I like his podcast. He's saying he's not super excited about Q1. Oh, also, Satrini, the market god who objectively has had a phenomenal track record the past two years, he says he doesn't like Q1 either. So I should sell. Well, it's like, even if Jack and Satrini are right, let's say the market goes down 8%, boom, and then it rebounds 8%, and then you don't get back in the market.

That is going to long-term really hurt you when you're 65 years old and starting to retire and withdraw your assets. So just a reminder for everyone that number one, it's about you. And number two, then it's about the market.

All right, Jack. Well, I think I would tend to echo your self-realization that you probably are more on the cynical and skeptical side. I agree with your take that many of the hallmarks of market tops like we saw in 2021 with just like complete and total shit hitting the market in the form of SPACs and IPOs is not there.

But there are some similar things. I mean, I think it was Trevor Milton, the Nikola guy, just put out a video on social media about how he did nothing wrong.

So when guys like that are putting out videos being like, I did nothing wrong. It was a massive overreach from all of these regulators. There's no evidence that we ever misrepresented anything. Like that is an attitude that is pervasive. I mean, Palantir is, is a good company. I don't think they're a fraud or anything like that, but you've got Alex Karp, um,

out there on CNBC saying like his goal is to bankrupt like coke addicted short sellers like when I hear things like that I'm not saying it's like a short immediately but it goes on a list of companies to be to to sell later and so those things happened this year and

And no, there's no new supply of recently listed speculative companies, but the quantum companies sort of like returning, some of them returned from the dead or they were name changes or whatever. We saw that with AI where companies changed their names, started talking more about it in their press releases, in their earnings reports to get these companies higher. So as much as it's not like,

10 of 10 of the speculative excess bingo board, there are many there. And I don't think you need to reach 10 of 10 to have a sort of correction. And the one thing we have talked none about at all in this is the uncertainty around President Trump's policy, right? So if he is going to, he's talking about cutting the deficit. Like, if he's cutting the deficit, that

Growth is going to slow. If he is putting tariffs on, that is going to be most likely inflationary. So all of these things that we have been talking about, about speculative excess, doesn't quite...

I don't think really hold a candle to some of these other risks that we didn't discuss today. But short-term as well, like PLTR, Palantir has not held up very well. MicroStrategy has not held up very well. And some of the other higher quality products

or more reasonably priced, Nvidia, Apple, et cetera. I mean, I think of the Magnificent Seven, I don't know exactly, but like Meta is the only one that's up today on announcements that they cut DEI from their company. But other than that, I think the big boys were hurting today. So when things like that are happening, when you still have these risks out there that for the most part, like,

Wall Street tends to have a right-center bias belief that Republicans coming in is going to be good for markets. I tend to believe that people are leaning that way. And the reaction today to good news being bad news says to me that support –

from policy is highly priced into the current valuations. And those are the types of things that headlines, data bombs can unwind very quickly. And as we saw on Fed Day in December, that when you're on the wrong side of that, things can move very quickly. And so I am...

in agreement that we're maybe not quite at speculative madness like we were in 2021. But I think there's plenty of stuff there to make the short term not very profitable for equity investors. Max, looking at purely equity, I will stand by. I think that maybe 5% to 10%. I'm not seeing a lot of fake companies. Turning to the world of crypto,

There, I definitely, speculative excesses are apparent. I sold a whole chunk of Solana again for lifestyle reasons, not necessarily that bearish, but good trade. But I don't think that in the crypto world, I mean, you have fart coin, what, over a market cap of a billion dollars because hot air rises. How could you say that's anything other than speculation? So there's, the speculative froth is evident in crypto. In equities, I think SOX,

Stocks are originally valued, but that's different than Spectrum Access. Why would you make a fake company when you don't even have to do that anymore? You don't even have to go through all of that bullshit to make a fake company when you can just make a meme coin and come right out and say, yes, it has nothing. It's all the meme. It's all the story. It is all about...

of showing the world that community and narrative can drive price more so than fundamentals and you can just deal with it. So yes, maybe the supply has just not been in the equity market. It's been in the crypto markets and we've only seen more adoption recently.

you know, more acceptance of these markets. And so, you know, players who traditionally would have played in these highly speculative equity names have just said, hey, I can be over here now.

Yeah, I'll say about MicroStrategy, I think I've kind of trashed. I've critiqued MicroStrategy, but what I have truly trashed is the MicroStrategy double levered ETS where billions of dollars were in these things. And these things were up 600%, 700% October, November. They are down a lot. When MicroStrategy is down 2%, this thing goes down 4%. And if MicroStrategy goes up 2%,

then this thing goes up 4%, but down 4% up 4% is not, you're not even. And, and,

That is down a lot. So that is definitely a pocket of excess. I think I might be able to interview Michael Saylor and maybe be proud of it. I definitely don't want to do a puff interview. I mean, he did an interview on a show. I won't name the name, but on a YouTube show, it got like 5 million views. The comments were like, Michael Saylor is a genius. Oh my God. He discovered this money-making hack that most of Wall Street can't be aware of. Yeah, that is a top signal. But I think if my

the stock market does decline 5%, 8%, 15%, 20%. I think the top signal won't be because markets were so speculative that they can't get any more speculative. I think it will be because...

like interest rates going up or there being a true recession, which honestly, I mean, Max, now let's return to-

and the idea that we were going to have another financial collapse, and there was going to be some systemic risk that brings everything down. And so many people got caught up in that and were underinvested for almost a decade and really missed out on the huge rise in stocks that came as we came out of the great financial crisis. The last war, yes, maybe there's the inflation rise, but the last big – a lot of the –

pain in equity markets came out of that speculative fervor. And so there's constantly everybody saying like, oh, we haven't even come close to 2021 yet. And maybe people are too focused on the last war and the idea that we're going to reach this complete apex pinnacle of speculative fervor. And that reality is that

you don't have to get there every time for markets to correct and mean revert and go back towards more reasonable valuations that you don't have to have 20 shit codes hit the market in a month for things to turn around. That sometimes it's profit taking, it's a realization that things are overvalued combined with a literal regime change. Yes. I think in the equity markets,

markets might be, while less speculative than late 2020 to 2021 and early 2022, they are still highly speculative in comparison to most periods going back until the dot-com bubble. I mean, they're clearly less speculative now. Dot-com, very little revenue. Nvidia tripled its revenue. The numbers are there. A lot of it has been to just Nvidia, but I mean, I think we're seeing it broadening out in terms of earnings, in terms of earnings.

I mean, Microsoft is going to spend $80 billion on AI CapEx.

I think they will see return on investment from their cloud. I think people do want AI cloud. Now, whether they want 5,500 large language models that are all funded by venture capital that are basically the same thing, I think you'll see some excess there. But that excess is not in the public markets yet. It's in the private markets. And to be honest, I don't follow it closely. Yeah, AI computing, I probably think it's a scam. And I probably think that most AI computing stocks that aren't Google...

I think they're probably going down. It's different than saying they're short because I know they're extremely volatile, like up 40% in a day. You don't want to mess around with that. Okay, let's get into the nerd stuff. Let's get into... Well, first I'll say...

The equity risk premium, basically, I think it's wrong to look at, compare the 10 year with the current earnings yield because earnings go up over time. So you have to price in a growth factor. And that is, I believe what Oswald de Motoren, who's like viewed as the Dean evaluation and probably the world's most renowned expert on this topic, or at least the world's most well-known expert on this topic. That's what he does. So I'm going with Oswald rather than the Bloomberg opinion page on this one. Second nerd point.

The next jobs month, so the January jobs data, nonfarm payroll, which will be released in early February, that will include an adjustment from the census.

So I am the furthest from an expert on this, but hopefully I can explain this accurately. And I do want to give attribution to Danielle DiMartino Booth is the one who brought attention to this. And that basically the non-farm payroll tax

Data is making a bunch of assumptions. They're not interviewing everybody. They're making a bunch of assumptions, and those assumptions are based on old census data and old birth to death ratio of businesses. And basically, there are a lot more people than we thought.

We're in America, basically, through immigration, legal and otherwise. And that basically those adjustments will make themselves known in the January data that will be released in February. I've been hearing Danielle talk about this a while. I finally did look up the Philly Fed paper on this topic. And I do think there's a chance that something's there. So there's a chance that

there could be a truly bad surprise in February. And again, the good surprise that we had today is actually so far bad for markets. The bad surprise, I think that could be bad for markets too. But I think that

you know, if after incorporating the new census data, the jobs market is still good, then I think the recessionista argument will have been fully disproven. And, you know, maybe obviously there will be a recession in the future. But I think that, you know, this really is the last stand for the recessionista argument. Okay. Well, Jack, I think that might be a good place to leave it. Thank you so much for letting me come on and join your show. Looking forward to doing it again soon.

Max, people should check out your own show, Other People's Money, where you talk about the business of the fund management industry. People who are following Monetary Matters on YouTube, as well as on the podcast, they have been listening to that. They should continue to check out that, as well as your own feed, where they only listen to the Other People's Money show. On Monetary Matters, I'll be speaking later in the month with the chief economist of Moody's Analytics.

Mark Zandi, his view, he has been the opposite of recession. He said that the economy has been fine and will continue, you know, has been good. He's been right. I mean, I think, Max, people, you and I have a cynical bias. I think the investing public, the consumer of news has a negative bias. Like they want to hear about a recession and they don't want to hear that. How dare you say there won't be a recession? But I mean, the real growth this year is what, 2.5%, 3%?

Do you want me to not give the soft landing people credit? Do you want me to just only talk to recessionistas who've been wrong? I mean, people... Well, there definitely will be a recession. We do not live in a recession-free future. That's for sure. Next month, next week, excuse me, I'll be interviewing Luke Groman. Really excited to ask about gold, about bonds, about Bitcoin. And then I'll also be speaking with someone who, I won't even say his name, but he works at a macro hedge fund

focusing on emerging markets. And he used to write the emerging markets section for the IMS financial stability report. That report is a big deal. If you're a nerd, like,

Jay Powell reads that. People read that and he wrote that. And now he works at a hedge fund, so it'll be exciting. So stay tuned. Follow me on Twitter at JackFarley96. Follow Max Weethy at Max Weethy. Follow the Other People's Money podcast. Max will give their handle in a second. People can listen to this on YouTube as well as Apple Podcasts, Spotify, and all other podcast apps. Thank you for watching. Have a great weekend. Thank you. Just close this f***ing door.