On the Tape.

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Welcome to the Risk Reversal Podcast. I'm Dan Nathan. That's Guy Adami. Yes, I am. That's Michael Kantopoulos. Love Michael Kantopoulos. He is the Deputy Chief Investment Officer at Richard Bernstein Advisors. Michael, welcome to the program. Thanks for having me. It is great to have you. I mean, you've been on Fast Money now for the last few years, probably longer than that. And we love having you on, especially around the times of the Federal Reserve. But today is a fascinating day, today being Thursday.

Jerome Powell and President Trump apparently met in the Oval Office. And there's a lot to talk about.

So let's just sort of drill down a little bit. It's clear this administration wants yields to be lower. I think they somehow think that the Federal Reserve can actually control the yields that they want to go lower. So let's just talk about that. Yeah, it seems a bit odd that President Trump is trying to influence Powell to cut interest rates when he wants the 10-year to be lower because the Fed doesn't really influence the 10-year at all, as we all know, right? I mean, they influence the front end. And

What drives the back end are growth inflation expectations. So if you cut interest rates and growth and inflation expectations are strong,

then what's going to happen? Longin's going to go up even more. And that's exactly what you saw in September of last year before the Fed cut rates then. You've never had a Fed cutting interest rates during a profit acceleration, and they did that. And the 10-year went from, what, 3.6 to 4.7 or whatever it was. So where does it go from here? I'm one of the few people that still think yields are going significantly higher. The TLT is going to trade down the levels we saw in October of 2023 and probably lower than that.

which suggests we approach 5% at some point. I think in the somewhat near future, there's been this tug of war at 4.5% for whatever reason. But to me, it just feels as though the forces at work for higher rates are more powerful than the ones for lower rates.

You know, Guy, I tend to agree with you, certainly over the medium to long term. I think we're going to see lower lows and lower highs on rates for lots of different reasons, which we can probably get into later in the show that are more structural in nature, whether it's deficits or inflation. I think near term over the next, I'll call it one to three months. That's certainly the risk.

You know, you had this event in 2022 when Liz trusts in the UK cut taxes. The gilt market blew out. She did that, of course, in the context of high inflation back then. And you actually have a very similar setup today. You know, you've got a situation where you've got

tax cuts coming at the time. We also have tariffs and potentially higher inflation. And you've got, internationally, no one wants to earn our debt anymore. So you could easily construct a scenario where the top blows off on the 10 year and you go back up to 5%. There are competing forces against that because I do think growth is slowing. And so the question is going to be, who steps in at 5%,

47 or 475 to cash that falling knife before you go to five. And that's really the next resistance level is up around 47, 475. Well, let me ask you this. Do you think Treasury is having backdoor conversation with the bank saying, you know, if Japanese, if the Chinese aren't going to be the sort of the buyers of this thing, you have to sort of step up

which would be normal, I think. It's not out of the realm of possibility, but I think at some point the market sniffs that out as well. Yeah, I think that's probably right. There's only so much that the banks can really do. I mean, you do have to have that conversation for market function purposes, if nothing else. But at the end of the day, it's kind of a...

Once the ball gets rolling, once the genie's out of the lamp, it's hard to kind of bring that back. And if you get the Chinese and the Japanese selling our treasuries, there's only so much of the banks can really do. All right. Let's talk about inflation expectations. Right. So if the Fed didn't have to contend with the uncertainty about a

protracted trade war do you think they would be closer to cutting interest rates because they can and we have this debate all the time right so back in september when they cut 50 basis points they were worried about an employment market that might have started to soften a little bit here and now you know we have data going now for six seven months since then or so it doesn't seem

We know that the government was doing a lot of that hiring. We know that that's kind of pulling back a little bit. But just curious how you think about that, because, you know, we have a market here in the 10 years, kind of like four at five. Right. And at five, some folks get nervous about equity valuations, about growth, that sort of thing. At four, you can get there for a whole host of reasons. Right. Because they can or because they have to.

Yeah. So, you know, I think that's a really good point about last year when they cut. Objectively, the hard data was weaker going into the cut last year. If you look at like July and August of last year, you look at PMIs, industrial production, just look at most of the hard data. It was pretty weak. And of course, you'd already tripped the SOM rule and employment was going up. I don't think they actually should have cut.

But I can understand their case for cutting in September. Today, it's a little bit of a harder sell in my mind. And I think tariffs, you can't really just strip out tariffs, right? I mean, tariffs are here, whether it's 18% weighted average or 10% or 30%, they're here. OK, so I don't think you can just say they don't exist. And I think the Fed's going to take a really hard approach to that. My guess is if you get a cut between now and September, which I don't think you will,

It's going to be a token 25 basis points for the market. Give them a gift type thing. It's not going to be the start of a new cutting cycle. I think they need demand destruction to help them with the inflation mandate. And so I think they're going to be willing to see the unemployment rate creep up a bit, whether that be to five, five and a half percent before they start to cut. Of course, once it gets there,

you know, you never stop there. You're going to go to six and then you got to cut hard. So it's going to be like 75 base point hikes on the way up. And it's going to be 75 base point cuts on the way down. Yeah. We had Mike Wilson on for Morgan Stanley last week. And he said that Morgan Stanley, their expectations are for seven cuts in 2026, which just seemed like, you know,

It depends, again, how you get there, like what the reasons are. But when we go back to September, you know, we talk about the long and variable lags of monetary policy. And you just said, well, maybe they give a gift, right, of 25 basis points. Have you seen what those 100 basis points and cuts late last year, what has it meant for the economy? Is there a way to kind of like put your finger on that one way or another?

Yeah, I mean, I don't think they did a whole heck of a lot. You know, when the market was pricing in a ton of cuts for twenty twenty five. All right. You did start to see, you know, reasonable economic growth. But it wasn't like you saw, you know, animal spirits or anything of that nature.

So I'm not entirely sure it actually had the intended consequence. In fact, you could make the argument, like I said earlier, did the opposite, that cutting interest rates actually tightened financial conditions because the tenure actually went up 100 basis points, which was not the intended consequence, right? But I don't think, listen, I don't...

You know how these things work, the long and variable lags. They didn't have an immediate impact. And I'm not sure we've seen really what that impact ultimately will be or even if there is any impact from it. I don't think the Fed is as tight as the Fed thinks they are. I don't think anything that we've seen. Listen, the economy is much less sensitive to interest rates than it was a decade ago. There's just no two ways about it. Every corporate has termed out their debt.

Every household balance sheet was repaired after COVID. Until recently, when floating rate debt has become a bigger issue and you're starting to see private credit markets, there's a whole nother issue, right? Private credit markets seen four times the defaults in private credit than in public credit. But that's a more recent phenomenon. Until recently, the floating rate debt even wasn't an issue. And so in my view, I don't think rates are actually as restrictive as the Fed actually thinks. Well, it's interesting you say that. You're right. I mean, homeowners were able to sort of get

get their mortgage rates down to extraordinarily reasonable levels. And you mentioned corporates. The people that haven't been able to sort of do what they needed to do is the government. And you know, you're talking about $37 trillion of debt. A significant portion needs to be rolled in the next few months. That's where the rubber hits the road. And that's why I still think rates are going higher. And by the way, you know, Moody's talked about that a couple weeks ago. So these conflicting forces are real.

I think the force of debt, deficits, demand sort of override everything else. And the question then is, what's the point

where the market starts to care? Because clearly the market doesn't care here. Yeah, well, just to hit really quickly on the rates, you're starting to see that in Japan, where the auctions are just, you know, they're just not good auctions. And now all of a sudden, you know, you're three plus percent on the 30-year, one and a half plus percent on the 10-year there. And the same thing can happen here without a doubt in terms of the demand side, just not matching supply. When does the market care? It seems like never, you know, but obviously there's a tipping point. I think if you...

Part of that tipping point for what it's worth is speed in which you get to a certain level, right? Like if you go to 5% and it happens over the course of a week, that's very, very different than if you go to 5% and it happens over six months in the context of pretty strong economic growth, strong earnings growth. That's a completely different scenario. The markets, all markets, hate volatility and uncertainty.

And so anytime you have high volatility, whether that be rate volatility or equity volatility, markets are going to price in a higher risk premium for that. So what I think is, A, depends on how fast you get there, and B, depends on what's happening in the macro environment. Are earnings slowing? Are they accelerating? What's the unemployment rate doing? But ultimately for me, on the equity side, it comes back to earnings.

You mentioned Japan and indulge me for a second because it was August of last year where obviously we saw a huge move in the volatility index. We had that huge downdraft in the equity market here on the back of that whole yen unwind trade. Yeah.

Dollar-yen got significantly low over the next couple of months, rallied all the way back. And now here's the dollar again, sort of faltering against the yen. There have been periods of time where it's rebounded, but it feels as though we're looking to get through 140. You mentioned they had the worst auction since 1987. Still, I think either the third or fourth largest economy in the world. That's a bit of a cautionary tale. How concerned should we be here for our equity markets, if at all?

I mean, I think it's pretty reasonable to be concerned. And that's why we've taken a pretty cautious approach at our firm. So I think it's definitely reasonable. And you can easily see another sort of carry trade unwind that affects risk assets in the U.S. I think that's entirely plausible and one of the many risks out there.

Absolutely. All right. So talk to me like I'm an idiot guy knows this stuff. So when we think about what happened in the first week of August, the stock market here in the U.S. had already kind of turned lower, right? For a whole host of different reasons. We're getting through the bulk of earnings season and maybe there was some sort of trepidation that we're seeing earnings grow slow a little bit into this year. And we'll talk about that in a second.

But why does the unwind of the carry trade? Okay. And we get it, you know, to some degree, like you take what you're given in that trade and then you invest it in a higher yield assets. How do we find ourselves, let's say 10 months on that we could have a similar sort of volatility in and around an unwind where did it just go back on? You know what I'm saying? After a short, just, just explain that to me and our listener a little bit, because it's not something that's on the tip of my tongue, but I'd love to kind of get a refresher as we head into the summer again.

Yeah, I mean, I think, listen, I think there's two things. Yeah, you kind of do constantly have that trade being put back on, number one. So you got kind of a, it's constantly rolls, right? So you get into the carry trade kind of keeps coming back. But the other thing was you had that unwind, but it wasn't like

You know, you still had carry trades on getting rolled forward, carry trades on getting rolled forward. So like it's still there. It's still present, you know, and what what you worry about is just to sell America trade continuing on. Right. And that happens in the context of higher rates. Right. In Japan.

And so if you got higher rates in Japan, you're repatriating that cash, you're selling U.S. assets, that carry trade is still there. I mean, it's probably not quite as big as it was in August of last year, but I don't have the hard data, but it's probably nearly as big as it was. So, OK, let's let's play that out a little bit, because for the first time in my memory, we saw.

Steve McLaughlin: A steep decline in the US dollar against just about every other currency out there on the back of yields in the United States going higher. Janet Yellen talked about that on one of the Sunday shows a few weeks ago. Historically, that's problematic for countries. United States has really never had... We're dealing with it now. So you just talked about the US trade sort of the

American exceptionalism trade sort of going away in the form of a number of different things. But how concerning should that be? Because I know a weaker dollar is, listen, they won't say it, but when you're $37 trillion in debt, one of the ways to get out of there is you grow your way out, which is not going to happen, or you devalue your currency your way out. And that's what they're trying to do. But they're trying to sort of walk that fine line between devalue the currency and then not disrupting other markets. So speak to that. Yeah, it's kind of crazy. We're a little bit of a banana republic.

public a little bit these days, it seems like. And I think it truly reflects sort of the the growth environment. Right. I mean, that's just what it comes down to and the lack of confidence in U.S. exceptionalism and growth going forward. And I think that makes

total sense given sort of our fiscal deficits, the stab in the back of our allies. I mean, all sorts of different things, right? But at the end of the day, it's sort of like if you think about it, this was primed to happen given everything we've seen over the last, you know,

10 to 20 years, really GFC and beyond. But if you want, you can even go back further than that. And so, yeah, I think it's only due, right? A new cycle is starting. And during a new cycle and a new regime, you usually have some sort of disruption. In this particular case, the disruption is

The world telling us that the U.S. has real problems. You know, it has problems on the debt side. It has problems on the inflation side. It has problems on the growth side. You can't grow yourself out of it. You can't inflate. Maybe you can inflate your way out of it, but that doesn't necessarily seem to be working either. So it's a it's it's I think it's a real big signal, a real warning sign for the next decade probably.

Yeah. And we keep hearing that the, you know, the American exceptionalism going away and, you know, you use the word regime. I think it does have all those problems that you just mentioned have been around for a while. Right. It is kind of poking the bear a little bit. You know, one of the things that, you know, I've taken a lot of issue and who the hell am I? But a lot of other folks that, you know, going after Canada and Mexico in the EU first seemed unthinkable.

a little odd, right? And especially if China is the problem for the rest of the world, right? And we are the standard bearers for the rest of the world. And, you know, the other thing is, you know, rather than doing what they did the first administration, going after the tax cuts first, which gave a tailwind to the economy, to the markets, and then they focused on trade, that

might have made a bit more sense. But again, you know, who are we to say that? So now let's talk about where we are, the taco trade. Okay. So like, this is something that is pretty fascinating to me because I don't know where, I guess some FT opinion writer, you know, came up with that or whatever. And, you know, it's interesting. I wonder if he's British, you know, we know the, the Sam loan paper is from over there and they tend to be maybe a bit more critical than the Washington journal op-ed, you know what I mean? Sort of situation. But

How do you make of this? If they're selling our dollars, if they're selling our debt, if they're selling our mega cap tech stocks and all the threats about a protracted trade war, we know he's going to pull them back. How does that factor into everything? Because again, we've seen this now a month and a half. I mean, the point is we've seen a pattern over the last two months or so. Well, two things I'll hit on. One is there's only so much selling

of US treasuries that foreign countries can do because it ends up being counterproductive. It becomes counterproductive for their currency, for their own rates, for the market value of their existing holdings of US assets. So so there is sort of a little bit of a counterbalance there. So I'll throw that out there. I don't think it's like the end all be all. The second thing I'll say is all of this to me means you have more volatility. Right. That's that's the big thing is you have less certainty, more volatility and markets don't like volatility. And I think I

I think if we knew what the tariffs were going to look like and state and Trump said, that's it, I'm done with tariffs. We're not dealing with them anymore. It's going to be 10 percent or 15 percent or 20 percent across the board. Nothing else. But we know that we'd be in a much better spot today. High yield has been obviously your area. There have been no meaningful cracks in terms of what people want to talk about.

but there have been cracks below the surface. I mean, there are things that are happening sort of in very slow motion that are worth talking about, but not worth sort of, I guess, putting on the front page of the journal or talking about sort of on CNBC. But they're clearly there. It's just a question of, you know, when do the cracks or when do the fissures start to open up a little bit more? So what are you seeing on the high yield side that either concerns you or sort of gives you some encouragement, I guess?

So there's a couple of things. One is the market's clearly resilient. I mean, you had a bit of widening right in April and as expected March and April, and it came right back. And so the market's pretty resilient. You've turned out a lot of debt, but you are hitting maturity walls coming up and you never default in high yield for what it's worth because you hit a maturity wall, right? You default because you can't make your coupon payment.

That is going to be a function of A, rates, but more important than liquidity, but more importantly, what earnings are going to do. So high yield, just like stocks, is going to be largely driven by earnings and earnings growth. What's concerning to me is over the last couple years now,

smaller companies that are outside of the syndicated high yield market. So think those in private credit vehicles or even those that don't even make the private credit vehicles, right? The smaller sort of $50 million revenue type companies, $100 million revenue type companies. You're seeing defaults that we haven't seen since 2010 over the last couple of years in those types of companies.

the weakest links always go first, right? The weakest links always go first. And so if you do get a meaningful earnings protraction or economic recession,

you know, high yields and next thing to crack the next lowest quality. All right. So you mentioned private credit. Yeah. And I think this is kind of attached to some degree, but you're saying you're starting to see what you said four times as many defaults. All of a low level. Yeah. Right. But that's how this stuff started. Like go back to 05, 06. People weren't worried about, you know what I mean? Subprime until it all started to, you know what I mean? Snowball a little bit. You know, it seems like every week for the last like 10,

months or a year or whatever, we see a story in the journal, in Bloomberg and CNBC.com and the FT, I mean, the list goes on and on about this bubble that's building in the unregulated sort of space as it relates to. So the banks are loaning to these private credit guys. They're like loving it because they're able to kind of get fees without taking the risk of the credits, right? So how does this go wrong? Because every time in our career where we've seen this sort of bubble in risk

somewhere else that we're not staring at every day, that's not nearly as transparent, usually something goes wrong.

What goes wrong is you get some sort of economic issue that creates a significant spike in defaults and you have no liquidity. Right. It's the liquidity that I think gets you in trouble here more than it is like the leverage, which was the big issue during the global financial crisis. So these products are being sold to retail. They're being sold to pension funds. They're being sold to insurance companies. And it's by the way, it's kind of, you know, you're constantly funding new commitments using the carry you're getting from existing products.

Right. And so the whole machine sort of stops. Exactly. If on the one side you start to stop getting the carry or the carry is reduced or, you know, you have to equitize a certain part of the portfolio and you aren't getting as much yield as you thought. And all of a sudden now you can't fund commitments and you can't sell your private credit. It's not liquid to fund commitments. Right. So what do you do? You sell your liquid investments to do that.

So you sell your liquid credit, you sell your equities, you draw down cash. And, you know, you can definitely create a scenario where that gets big enough, where it creates a lot of for selling and the things that are liquid. That's how it bleeds through to sort of the more traditional markets. Yeah. And that's I think if anything keeps like the Federal Reserve and those people awake at night, it's thing, it's events like that, what you're just talking about. It's sort of liquidity event and the grinding of the gears

which, you know, that's the scary scenario out there. And it's not necessarily the likely one, but you're right. Things are pointing in that direction. And you mentioned the defaults you're seeing. I mean, just on the consumer side of things, you're seeing delinquent 90 day delinquency rates at levels we haven't seen in 15 or 16 years, very quietly ticking higher that nobody's paying attention to what people are paying attention to a lot of these international markets. And you've talked about this as well. I mean,

to the extent that the US might be a scary place. I mean, Europe's been a great place and some of these developing countries, Brazil, for example, getting off the mat. So speak to that. Yeah, I think, listen, I think there's two ways to think about this. Again, I always throw the secular versus the cyclical because I think it's important to think, you

you know, as we're going through this regime shift that I mentioned earlier, what's going to be the next big three, seven, 10 year trade, if you want to call it that versus, okay, I've got six to 12 months, right? What do I, what am I going to do then? It could be completely the opposite. So on a, on a longer term basis, on a secular basis, I think international is going to thrive.

And not to say that parts of the US aren't going to thrive either. I think you can see value do well. I think you see middle America industrials do really well as you sort of have the on-shoring and reshoring. But I think big picture, whether it's Europe, who needs to be more self-reliant, probably increases fiscal spending over the next decade, whether it's emerging markets, which are going to be commodity focused,

in some areas, maybe even a bit tech focused and otherwise focused. You know, I think they provide a big opportunity near term. It depends on where we're talking about. You have the beginnings of a global earnings slowdown. Mm hmm. And it's not just a U.S. phenomenon. It's Europe, it's Japan, it's emerging markets, it's China everywhere. Earnings are slowing. So emerging markets typically are not going to do well in that world. Right. They're high beta. They're highly cyclical.

You know, that's probably not the place to be over the next six months. Europe's higher quality. Europe and UK are higher quality. So, you know, we're fine there.

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So let's talk about that slung earnings growth here in the U.S. I think coming in, what were we, 13.5% expected EPS growth? That was the FACSAT consensus here. And right now, I think they're reporting our main man, John Butters. We've been looking at his work, the Earnings Insight blog. Do you get that? No.

Oh, that's great. You really should. How can you not? How can you not? And right now it's expected to be like 9%. So let's think about this. Okay, so we're halfway through the year. We just got through Q1 earnings. We heard a lot about Q2 guidance, which wasn't nearly as bad as a lot of people thought it would be. So if we come in at 9% expected growth, is that so bad? Do you know what I mean? Like, what's the average? I'm not trying to pick you off here, but the average, you know, and, you know,

over the last, like it's called 30 years, it's probably, you know, I would say mid to high single digits. Does that make sense or something? Average is tough because you've had some big cycles, right? I mean, so that's, you know, post COVID you had crazy, post GFC you had crazy, but yeah, sure. It's called mid, high single digits. Right. So is that a function of strategists a little too geeked up last year or is it that we really are slowing, you know, off of a 14% down to 9% or so? So let's go with our earnings estimates. Yeah.

So we model out sort of where we see earnings over the next, you know, nine to 12 months. We see by Q4 year on year, last 12 months, the way we look at it. So smooth things out a little bit. So last 12 months, year over year earnings growth approaching zero.

So I think that's a little bit out of consensus. And that's a function of margin compression. So all of our forward-looking data suggests margin is going to continue to compress. And that could get worse, not better, depending on tariffs. Maybe it gets a little better depending on tariffs. But we thought this was going to take place

regardless of tariffs. So back in January, February, we were calling for earnings to peak in Q2, Q3. Now we're seeing them peak in Q1. It's a function of lower industrial production, too rosy earnings estimates, like a whole host of different things. Remember, earnings estimates always go down as the year goes down.

Right. So they start off really rosy and by Q3 you start seeing big cuts. There's a pattern to that. You can look at that pattern over 40 years. Earnings estimates are always coming down over time during the course of the year. When you factor all these things together and you throw into, you know, a little black box, what you get is low single digit earnings growth. You're going from 12, 13 percent to zero. That's not a disaster for what it's worth. Right. But remember, markets trade on direction. Right. More than absolute level.

And so if you're going from low teens to even three or four percent, if we're off by a few hundred basis points, like the playbook's the same. It doesn't matter. Now, if you go from low teens to 10, that's different. That's a no cycle. That's not a slowdown. That's a no cycle, right? But if you go to low single digits, that's a real slowdown. And don't forget, we're not modeling out to 2026 yet. Once you get into 2026, that might slip negative because now your comps get harder.

And so you may be talking about earnings recession as you look into early next year. Now, maybe that's not the case. We don't know. But you could certainly create a plausible scenario for that. How much of a problem is inflation still, if at all? I mean, I still think it's problematic. The data we've seen over the last couple of months suggests

Things are cooling a little bit, probably still a lot higher than people thought at this point. But, you know, at least trending maybe the right way. Thoughts on that? Yeah, I mean, I think it's definitely trended the right way. But, you know, I think you're right. It's still a problem. You know, it's not an 8% problem. It's a 3% problem, right? Right.

And that's probably, you know, I think we've heard this a lot, right? This is not unique to RBA, but that last leg from 3% to 2% is going to be the hardest one, right? And I think that's proven to be the case, obviously. We think inflation is going to be reasonably sticky, and some of that has to do with the tariffs, of course, right? And so if those went away completely, then maybe it's a slightly different picture, particularly if growth slows.

But yeah, and that also leads me to another point, which is if you've got declining earnings growth, sticky inflation, the stagflation calls are going to go through the roof soon. Right. I think they're definitely going to go through the roof. But every cycle has a period where it appears like they're stagflation. Well,

Well, that was going to be my next question. On top of that, since you brought it up, the final piece to that stagflation puzzle is the employment picture, which you sort of addressed earlier, but drill down a little bit because, you know, you mentioned the SOM rule being triggered last year. She walked it back, by the way, in the month in the aftermath, but it's out there.

It feels as though we're just setting up a few, all the underlying, the jolts, everything you look at suggests the unemployment rate's going to start to move. And once it does, and you sort of said it, it's sort of escape velocity. Once you think you can control it

You can't. So speak to the importance of that in this whole pastiche. It's really important. Today's claims data wasn't particularly good. Continuing claims haven't been great. I feel like the continuing claims are worse than the initial. I think joblessness or unemployment is the linchpin of everything at the end of the day. And it's always the last to go.

The problem is if you're realizing, I can speak to this because I own two coffee shops, as you guys know, right? And so you've got choices to make as your input costs are going up. You either shrink your margins. Right, or fire people. Pass it to customers or fire people or some combination of all three. And the reality is 90% of businesses are going to do some combination of all three. We'll take a little bit of a hit on margin. We're going to give a little bit of a price increase to our customers and we're going to fire employees. Right.

Or at least not hire employees, right? And at some point, that's going to come, you know, it's going to come home to roost. And so it's always the last thing, though, because the first two are really easy to do, right? I'll change your menu, you know, and eat your margin, and that's fine. And then it's employment. And so that comes, I think, later this year. We may already be in the beginning stages of that, given the claims day to day. We'll see if that continues. So you mentioned this, you know, stagflation.

I've been in the business now since the late 90s. We really haven't had a stagflationary period. And there's a whole host of reasons, right? When I came in, I was a bull market baby. All we want to do is focus on internet and fiber and all that sort of stuff. And there was meant to be this kind of deflationary force. And we were having conversations about what does it mean for the employment picture and the like. And flash forward now, 25 years, we're having those same conversations about generative AI. But when I think about...

like let's work into some disruptive technology in here because stagflation is one thing. Okay. And again, I just said that we haven't really seen that, but then you have this counterbalancing sort of thing of higher productivity, possibly. I know that, you know, um,

Maybe it leads to job cuts, but we can use that ATM example from 50 years ago, that sort of thing. So just help me think about like we're in this phase where there's a lot of economic uncertainty. It's not something that a lot of market participants or even consumers or businesses have had to deal with. And then on the flip side of that, you have one of the biggest narratives that have been driving, you know what I mean, market gains for the last two and a half years. And it seems at some point they're going to smash into each other a little bit. Yeah.

You touched on so many of my favorite topics in there and whether it was advert or not, or inadvertent or not, I'm not sure. Number one, you just compared worthless cable on the ground of like, you know, 1999 and 2000 to AI. - So you saw where it's going. That's a separate conversation. - Which I love, by the way. Listen, AI is gonna be transformative. Just like blockchain may be transformative, you know, sure. I don't think crypto is, but maybe blockchain technology is.

The internet was also transformative and so were cell phones. I remember the internet was supposed to be massively productivity enhancing and we went through, we've gone through basically since the advent of the internet, you know, massive productivity declines. And so whatever happened with that, I'm just not convinced that these things ultimately play out the way that investors. The technology can be amazing, but it doesn't have to mean that it changes the way our economy works from here on out.

Even if it does change the way the economy works, it doesn't necessarily change what you should invest in in terms of stocks long term. Remember, return on capital is always greatest.

where capital is scarce, not where it's most plentiful. So if everybody's, listen, if you want to be, you know, a financial advisor, right? You don't want to be a financial advisor in a town where one person needs financial advice and you got 10,000 financial advisors. You want to be the one financial advisor in a town of 10,000 people who need financial advice.

And so that's where your return on capital is going to be greatest, right? Building a business. It's the same thing about stocks. If everybody's rushing to AI, then how can that logically be the best investment long term? It can't be. So you don't think that that technology can disintermediate some of the fears about growth in the like.

I think probably on the margins, maybe. Right. But listen, if you're going into, you know, acceleration, the economy is going to accelerate with or without AI. And if you're going into deceleration,

i think any for there's going to be no force outside force like ai to stop a deceleration that doesn't even that just doesn't make yeah there's going to be one-off situations i mean guy keyed on this last year at one point where um you know walmart saw a re-acceleration in the retail business and they're basically talking about investments that they've made in general of ai and it was logistics it was you know targeting in the whole but then there was this other scenario where klarna okay this is this you know fintech lending company or whatever

and they were telling a story before they were meant to go public. They pulled the deal because of market volatility and the like here. But they said, you know, we cut 700 jobs in customer service because of our investments in general. Well, you know what they just did like a month ago or so? They said, ah, that was wrong. We had to hire all those people back. So like it's going to be fits and starts a little bit on that front. I think it's going to be...

Listen, I'm not an AI expert, so who am I to say? But I think it's going to be more of a tool that's used, right? And you're still going to need people to manage what comes out of that tool. I mean, I use AI all day long, but I still, I use it, you know, to augment my job, provide me with answers. And I understand that's a very- Intelligent assistance. I think that's- Turn the AI around. And listen, for every job it, you know, destroys, it

it may create two others in other areas of the economy that we're not even fully aware of. So I don't see it as a job killer. I don't see it as a massive productivity enhancer. I see it just as another cool technology that's going to certainly affect the world. But is it going to be so transformative that like economies never go down again or have massive unemployment because of it or is significantly more productive because of it? Probably none of those things are probably going to be the case.

Well, it's not a cool technology, but it's become cool again. What has the gold market been telling you over the last year? What, if anything, is it saying? So it's interesting because historically you can explain about 92% of the price of gold through two factors, real yields and the dollar. That's it. Those two things, 92% of the gold price can be explained by those two factors.

One other variable is the other 8% uncertainty. Uncertainty is the other 8%. If you actually bring up like, you know, an uncertainty index versus gold today, they're perfectly correlated. There's several of these uncertainty indexes out there, right, that are produced.

And that's really what it is. It's an uncertainty hedge. And I think that's what gold is telling you right now. So this is more than anything else, a way to get certainty. Fair enough. And I'm with you. I think that other 8% has now probably grown a little bit. I think that's right. But I think part of that now is just central banks have really inserted themselves in the conversation over the last few years in a meaningful way. So historically,

you know, they were a small part of this puzzle. They've become a very large part of the puzzle. And what I've said, and I'm curious, like, I think they're just hedging their ineptitude or they're hedging what they've created. Good for them, by the way. But there is something to that as well, I think. In terms of their, what, their signaling to the- I think they realize what they've created. Yes, I think that's right. I think that's right. And listen, I mean, there's no doubt that governments ever in the world have been so overly involved in financial markets that

that they can't get out of their own way. And I think they realize that the only way out of this is through a deep recession.

And that's really it. You got to wipe out all the excess that's been created through massive central bank monetary easing through zero interest rate policy and quantitative easing. And so, yeah, I mean, I think if you're a central bank and you know that's the only way out, you protect yourself. You know, gold may be one of those areas. I think that's totally reasonable. So I got myself in a little trouble on Fast Money the other night. We were talking and

As I will do every once in a while. I just said, well, you know, we have recessions every six to seven years on average. Not anymore. Well, I mean, they all jumped on me, man. Don't look at me. I don't want you to jump on me. And you know what I did? I went to the perplexity and I said, how many recessions have we had? And, you know, and said 12 since 1945. Don't we often quote the post where? So I did 80 years divided by 12 and I got 6.5%. I'm just saying. Well, what were they jumping on you about?

They were like, well, we have Tim was like, ah, we've had two in the last one. And I get that. So there's a whole and I think what you guys are saying, I'm joking, obviously. What you guys are saying is that the federal reserve or central banks all over the world and guy uses this term, they've alchemy out recessions for all intents and purposes.

So take COVID out of the, you know what I mean, out. And then we obviously had financial crisis and then we had post.com, that sort of thing. And there's a whole host of things going on there. So how do you have a deep recession right now if these guys, they're not gonna stop meddling, right? And when I say these guys, they're not gonna stop meddling, but if that's what they need to kind of reset, you know what I mean?

How does that happen? Because we've had earnings recessions like you just kind of intimated. How do we have an economic recession? And isn't that the thing that we all fear? Because no one wants that. If you're a corporate, right, and you're relying on enterprise demand or consumer demand, it kills demand. Yeah. Yeah. Well, that's what you need. Right. That's what you need to wipe out the liquidity of the last 15 years. I think that there is a self-curing mechanism here.

All liquidity begets inflationary impulse, and that ultimately allows for or creates an environment where central banks can't be as involved in the next crisis. Because if you're at 3% or 4% inflation, right, then the Fed put, so to speak, doesn't necessarily exist like it has in the past. I'm hopeful that during the next run-of-the-mill recession,

Let's define that as being not a pandemic, natural disaster, or banking crisis. By the way, SVB, First Republic, fears of a banking crisis. And just liquidity comes in. So there was no clearing of that. I would have been the most. So I used to work with, I wonder if he listens to the podcast, Wouldn't Surprise Me. I used to work with this guy at Anchorage.

one of the smartest, most brilliant investors I've worked with. And he used to say, oh, I'd be the most vindictive central banker. And I would be the most, I think I would top him. I would have let it all burn. I think Guy would top you. I would have let it all burn. I mean, that's what we needed. Now, I don't think the Fed will do that. But this kind of goes to my point of what I said earlier. They're going to be late to cutting. I think they're going to need demand destruction. They're going to need...

the economy and sort of the increase in the unemployment rate to slop up some of that excess liquidity in order to allow them to ultimately cut. And I hope, I have nothing but hope here, I hope we don't see QE ever again in my lifetime. I hope they cut rates, whatever it is, maybe Morgan Stanley's right seven times, right? 200 base points, whatever. And then that's it.

I'm with you on that. So before we get out of here, and this is not meant to tee you up, but we all watch CNBC all day long. And I'm sure there are times when you say, I wish they would talk about this. What is the this for you? I think I'd maybe recast that.

what do I wish they stopped talking about? I wish they'd stopped talking about Mac seven. I hate that term. I'm done with it. Let's move on. Have you tried the fateful eight? Oh God. That one works too. That's just as annoying for them. Oh, sorry.

- Listen, you maybe can say there's one that's magnificent now, Nvidia, fine. Nvidia, yes, I get it, Fast Money is a trading show. CNBC caters to traders per se. It's a position, it's not a portfolio strategy.

You know, I think. But it is a portfolio strategy because those seven names are 50%. It's become a portfolio strategy. Well, no, but they're 50% of the way to the NDX. Well, I get that. They're 30% of the way to the S&P. And so, I mean, listen, I get it. I don't spend a lot of time. You've been on the show with me. You know, when we get in the C and D block and we're getting into like airlines or home builder, I got nothing to say. Because to me, if you think about the performance contribution and the earnings contribution of those seven names, let's expand it to 12 if you want. You know, this is the, you know, like, you know,

800 billion to three and a half trillion dollar names, it's hard to avoid them. I think we're talking about semantics in a way. It's like, let's stop using that name. We think it's dumb too. So when I came up with the Faithful Eight, I was just kind of making fun of the Mag Seven. So how do you ignore that? You know what I mean? That concentration, but not just the concentration of the stock, but also the earnings contribution. So the earnings contribution is declining pretty significantly.

I had the statistic. I should have looked it up before I got on the show. There are probably 100 companies in the S&P 500 with better earnings growth than every Mag 7 other than NVIDIA. And that's, to me, if you want to talk about earnings growth, you're not talking about Mag 7. There are a lot of other companies out there with better earnings and better valuations, but you just don't hear about them.

You know, and so. Well, partially because they're like $100 million market cap companies. You know what I'm saying? Sure, but who cares? Yeah. I mean, right. The goal is to create a portfolio that outperforms. Yeah, but if you have a Microsoft in there with expected high single digits earnings growth or Apple with mid single digits, you know what I mean? Like that kind of crowds a lot of these other guys out. It does. And it distorts sort of.

portfolio theory. But does that make you think 21 times for the S&P is way too expensive if it's really been on the back of like these seven names that are seeing earnings growth decelerate? It's still expensive. Yeah. For sure. It's still expensive. But when you strip them out, it's going to be much less so. Right. Michael Cantopoulos, it's always great having you on Fast Money. This is your maiden voyage here on the Risk Reversal Podcast. We'll absolutely have you back. Thanks for joining us. Thanks for having me.