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Welcome to the Risk Reversal Podcast. I'm Dan Nathan, joined by Peter Bukvar. He is the CIO at Weekly Advisors. Peter, welcome back to the pod.
Dan, part two, and I get it with you instead of Guy this time. Well, that's what I was going to say. Okay, so when I said welcome back to the pod, you guys sat down for about a half an hour earlier today, right before the announcement of the push out of most of the tariffs, I guess, by the president. And we'll talk a little bit about the reaction there. But you guys had a great conversation. You were talking about bond market volatility broke. That's
stuff down a little bit. Just some of the uncertainty in around policy and how that was weighing on the markets. We're going to talk about how some of that has been alleviated in just a couple hours here. And really, as we kind of get into Q1 earnings, you guys had some thoughts there and generally about earnings estimates and the like here. All right, let's quickly go through what happened. I think this was shortly after one o'clock. The
president already actually tweeted out uh bye bye bye or something like that a couple hours earlier so whoever got the memo there i hope they're making a lot of money right now just to kind of level set things the sp is up nine percent the nasdaq is up 12 that's on the day the vix has gone from you know the low 50s down to the low 30s the move index has come in a little bit here um
We're also seeing crude oil had a huge rally. It was trading, what, 57 or something like that. Here we are at 62.5. Gold has actually increased its gains. It was up maybe 100 points when you guys were talking earlier today, and now it's up about, I'm looking at 122 or so. And the Dixie has rallied. It was a little over 102. Now it's a little over 103. All right, Peter.
Help us make some sense of this. What was the announcement and what do you make of it? And again, we'll talk about the reaction to it and all of these risk assets we just mentioned here. All right, so let's break down the tariffs. First, we had steel and aluminum. They're still on. Then we have auto tariffs. They're still on. Then we had Liberation Day, 10% tariffs across the board. They're still on. It's the reciprocal piece of
on all countries ex-China, where China's tariffs are now up to 125% on them, 84% on us. So just seeing some relief on the reciprocal side, where we know from what they told us a week ago that those were sort of made up numbers anyway.
So I think there's nothing like having markets tank 20% in a week to sort of wake you up to say, maybe I should change course here and
And that's exactly what happens. And it wasn't like he he being we know who woke up and said, OK, maybe I can I should, you know, change tact here. It was, you know, the market started to freeze up. Credit markets started to freeze up. Global trade.
which we don't see staring at the screens, but you have to understand that global trade was freezing up too. So now we have, at least on the reciprocal side, 90-day respite.
But still maintaining the tariffs on China is not much of a respite for those businesses that source their product from China, whether you're Walmart, Apple or a small business where China is your only supplier. So the rally is nice today. It's it's it's certainly better than going down. But as I wrote in a note, like pass the Dramamine, because I still think that this is going to continue. Yeah.
Yeah. So let's just talk really quickly. You really laid it out very nicely. You know, what is going to stay and what's been taken out and the things that have been taken out of that funky math that we all saw last Wednesday afternoon. So at the end of the day, you know, how important is what they just announced? I mean, you know, your guess is as good as mine. You know, we're into the close here. There's probably like five minutes left in the trade. Um,
You know, we're up nearly 10% in the S&P 500. You know, Peter, I went to the Google machine and I went to see what were the largest percentage increases in a day for the S&P 500. This is probably not going to surprise you. Half of them came during the Great Depression. OK, another few came during the financial crisis. Another one or two came during COVID.
87 crash the next day and then here we are today and there's something there's a through line here okay as far as some of the stuff that we're seeing now we know this you've heard this a million times you know the biggest sharpest rallies you ever get are in bear markets that sort of thing but you know it's funny this wasn't a financial crisis to the scale of any of those things that i just mentioned a lot of folks said this is a crisis out of trump's own making and there you go i mean a lot of us were talking about this
There was a flip of the switch where he could go and he could do something like this and take a lot of credit. I'm sure at 401, we're going to see a tweet. He's going to say, you're welcome, America. You know, like that, you know, your thank yous to your 401ks or whatever.
But at the end of the day, what sort of reaction? Let's say no news comes out, okay, between now and Friday's close or something like that. How would you expect a continuation of this? Are you expecting some digestion? Like how is this going to be reviewed after we see this kind of knee-jerk reaction? I mean, we being the S&P or the NASDAQ, we got so far below the 200-day moving average.
And even with this rally, we're still well below the 200-day moving average. So can we maybe get back to it or close to it? I guess. I think the problem with the market, and I talked about this with Guy, is that there was an underlying fragility that had grown even before the tariffs. That fragility was caused by the markets losing the AI tech trade as this
this driver of performance and whether it was the deep seek news that sort of, you know, slammed the, the, the, the, the door on, on this trade, or it was, you know, Musk's issues or whatever. Um, to me, that door is still shut. And if you had, if you lose 35% of the S and P in terms of a leadership group, you know, you got to find something else rather quickly. Uh,
We also know a big driver of economic growth has been government spending, which I've talked about also with Guy. Well, in terms of its growth rate, we're potentially losing some of that. So the tariffs were sort of a pile on to what was already, you know, shaky knees with the market. And those shaky knees are still there.
And while we didn't see the worst of the tariffs, we still are going to live with a lot of the tariffs. So I'd be wary of this rally. And if you felt that you got over your skis on the long side going into this decline and you wanted to lighten up, well, use this rally as a reason to lighten up.
It's a real shame. When you think about what's happened since last Wednesday when they announced these tariffs and just the onslaught of selling. We had a down 5% day on Thursday. We had a down 5% day on Friday. At one point, we were down 5% on Monday. A Fugazi...
Sort of rumor, ironically, very similar to what we just got today about a 90-day pause is the thing that caused a sharp rally. But then yesterday it looked pretty bad. So here you are. We were down a couple percent on the opening. You get this sort of rally on a piece of news like that. Listen,
is good news let's be clear at least from a psychology standpoint because the negativity was getting pretty large there but when you think about just all the folks that were selling into this and to have this thing turn on a dime like that you know you're a an advisor or bleakly you know you have a bunch of advisors there obviously a lot of advisors you speak to lots of clients a lot of people were getting pretty worried about this sort of stuff
not just in their investment portfolio, but in their whole lives. You know what I mean? When you think about, you know, how these sorts of tariffs might interact with their own businesses, you know, what it might mean if we go into recession, what sort of job cuts might we have, that sort of thing. And just to kind of pull
play this as a reality TV show, it's a real shame because there's a lot of folks that are just going to get really turned around by this. And let's just say you were selling Monday, Friday, Thursday, you know what I mean? That sort of thing. Are you going to go out and buy back right here? You know what I mean? This could be the worst possible scenario for people who are probably getting too active in the management of their portfolios. There is long lasting, this is in my opinion, long lasting reputational damage that has been done
long-lasting trade damage that's been done in terms of who can a trading partner trust, who a trading partner wants to do business with. There is potentially long-lasting attitudes towards investing in the U.S. if you're a foreigner. There's potentially long-lasting impacts in terms of what multiple you want to pay for U.S. stocks. Do you still want to pay 22 times earnings?
like we did as we were coming into the year? Do we even want to pay 20 times earnings for what's going on? So this is not going to be fixed by...
setting the house on fire and then showing up with the fire truck and putting the fire out. Because even when you do that, the house just burnt down. That's not necessarily the case here, but you get my analogy is that we can't just assume that we're just going back to the way we were going into this. But I do want to emphasize that tariffs sort of put us over the edge, but there was fragility that was building up
even before the tariffs came out. Yeah. I think in any period prior to this sort of sell-off in equities, there's always some underlying thing, you know what I mean, that's happening. And it kind of, to your point about the fragility, it kind of puts the market or the sentiment in a place where it doesn't take a whole heck of a lot to have this sort of cascading to the downside. One thing that's interesting, Peter, based on what you just said and all the risks that it does from credibility and a whole host of other things,
You know, the president, I guess this is The Wall Street Journal reporting this. He was watching Jamie Dimon on Fox Business this morning, and he talked about the likelihood of going into a recession. And we know through a lot of reporting that there were dozens of CEOs and obviously a lot of these big hedge fund guys had become very vocal in the last few days or so. And it's just interesting to me that to play the sort of, you know, tough guy the way he did. These are staying there. There's no negotiations. This and that.
And in his tweet, he basically just said, "75 countries have called us." He didn't say we're negotiating with, he said they didn't do the reciprocals and they've called us. So, you know, this is something that, and I want to get your take on this, is like if you're China and you've already prepared for this, you knew that this was going to be coming, right? You knew this on November 6th, right?
You actually knew it prior to that during the campaign, right? And they've been trying to stimulate their economy going back to the summer, right? They've been trying to kind of weather the export bans as it relates to
you know our advanced technology and you know we saw that you know deep seek was a great example and and even if it's like a fraction of as innovative as they were we have forced them to innovate on some of the levels right that where we thought we had advancements so if you're sitting here and you're the chinese and you basically take the they we've taken our foot off the neck of
all of our allies, and they've enjoyed that, trust me. Like think about that, right? They've enjoyed us picking apart some of these longstanding relationships, whether it's economic and also security and the whole host of other things. What does it tell the Chinese about how to go forward and negotiate here? Because I've been saying this, I think for nine years now, Trump is not a good negotiator. You know, the whole art of the deal thing is a bunch of bullshit, right? He always shoots the hostage.
He says the quiet thing out loud. He's just done it again to a scale that I don't think we've ever seen him do. So what does this kind of suggest that the Chinese should go about and do right now?
Well, this goes back to 2018 when they were first slapped with tariffs. They started their pivot back then. They came to the U.S. and they sort of kissed the ring and they wanted to make a deal and so on and so on. But they started to mutually pivot. Not only those tariffs, but what really lit a fire under China in terms of their desire to be much more independent of us was when Trump almost took down Huawei.
when Huawei was literally on its deathbed because we limited their ability to get certain semiconductor chips and other things. And China said, OK, we can't do this anymore. We're going to have to develop this ourselves.
And then that obviously was followed by a progression of things under Biden, where he limited also China's access to particular technology. So what are we seeing? We've seen China grow by leaps and bounds in terms of developing out its technology industry. So now we're at a point over the next five to 10 years
U.S. technology companies are going to lose China as a customer because China is going to say, well, we don't need you anymore and we can do it ourselves. And not only that, China's companies are going to compete against the U.S. around the world. And, you know, if you're in Singapore or if you're in Europe and you say, yeah, OK, U.S., you know, I really like you still. But, you know, China's got this product that can do the same thing as yours. And it's it's it's half the price. So I love you. But, you know, I need to save some money.
So the attempt to suppress China. Now, I understand the issues that we have with China in terms of stealing IP and the authoritarian government and the suppression of human rights and what they did to Hong Kong. And we all know
the actor that they've been. But from a purely economic standpoint, they are progressing fast. They are the dominant player in EVs. They are going to be the dominant player in robotics. They want to be the global dominant player in biotech. I mean, they're graduating more engineers in a year than we've done in many years. So I think
It's a very delicate thing. I would prefer that we competed against them, even though they don't necessarily compete fairly, as we know. But I think trying to suppress them has backfired and will continue to if we keep this up. Yeah. And we've shot ourselves in the foot here on a whole host of different ways as we kind of deal with them. You know, I don't think Trump has a whole heck of a lot of credibility as you think about just he's the one who puts forth things.
the tick tock ban going back to 2017 as recently as a couple weeks ago as he keeps giving this thing you know uh pushing out the the ban here in the us and trying to kind of figure out a way to have a us company buy this from byte dance you know he suggested that they might get a slightly better deal with tariffs that makes no sense right and so when you think about you know what obviously what has gone on with the export bans with our advanced technology you know they've had stripped down chips that
you know, Nvidia has been able to sell. Well, there's two to the Chinese. There's a note out today, Trump halts US plan to ban Nvidia AI chips in China after dinner with CEO Jensen Wang. I mean, think about it. He's just so transactional. And so your point, I just, I feel like the China thing will not get fixed because we basically backed ourselves in a corner right here. And, you know, this is a real problem. And I agree with you. I mean, China is our adversary.
But the fact that they did this ass backwards by going after China, Mexico, Japan and EU makes absolutely no sense. So, again, here nor there. Just to kind of just kind of level set. One of the stories that I read this morning is the Spanish prime minister is going to China because they want to work on deals now with China because Europe now can't rely on the U.S.,
So, China is now going to develop these trade blocks with the rest of the world. Ex-US. Yes.
Well, the other point about that is like when we killed USAID. OK, that's soft power. Right. That is, you know, that's there to kind of combat Belt and Road by China in some way, shape or form. And to your point about now, you know, other countries around the world who are going to look to China for their technology, you know, because open sourced, it's, you know, it's government subsidized. It's all these sorts of things that.
Again, we know are a problem, but then you have now a digital Belt and Road, right? And so when you think about just where they are making huge advancements on us, have you seen the data about shipbuilding, the Chinese, how many ships they build? I think that we had one warship built last year to like, I don't know, hundreds of possibly theirs. You know what I mean? I guess between commercial and military. So we got to get our shit together, but I'm not sure, you know, 104% tariffs are the thing that's going to make it happen.
I think we're taking our position for granted in terms of our business dominance around the world and forgetting that about three quarters of global GDP takes place outside of the U.S. 96% of the world's population lives outside the U.S.,
And we still need to tap into that. And I, I, I fear that we risk disrupting that, that, that, that situation. And, and,
the sort of the economic ball is going to be run in the other direction by the rest of the world. Yeah. Well, listen, I think, you know, everyone's kind of rooting for like a situation that doesn't cause some sort of financial calamity, that doesn't cause some sort of security, you know, geopolitical sort of calamity, that sort of thing. And hopefully, you know, you
Hopefully we can get through this, you know, but I'll just say this. The way in which decision making process has kind of gone about over the last couple of months and a whole host of different things. I mean, I don't know about you. I don't have a lot of confidence in it. And I think a lot of our allies have lost a lot of confidence. Everybody went in hopeful on January 20th. But I think what's happened over the last few weeks should cause anybody on each side of the fence to kind of be worried.
a little bit skeptical about how we move forward. All right, so the market closed, Peter. The S&P closed up 9.5%. The NASDAQ Composite closed up 12%. The VIX closed at 33, down 20 points or so. You have the 10-year yield at 433. You have crude oil at 62.5. The Dixie, the U.S. dollar at 103.12. You just said you'd be kind of selling into this, okay?
At what point would you feel comfortable that the bottom is in and we have now the framework for, you know, some sort of economic recovery? Because make no mistake about it. I mean, Q2 is probably got a big, big, you know, hole blown through it as far as economic growth. I think that's fair to say. And a lot of folks thought maybe Q1 was already kind of, you know, in the shitter as it was. I'm just curious, like at some point, what are the things that are going to make you feel like we are basically out of the woods?
It's a good thing that earnings season's upon us because we get to hear how the business is responding and how consumers are responding and so on. I want to see what is the response in terms of upper income spending to this sort of mini earthquake in the markets?
Are consumers the upper end? And I specify the upper end because we know the top 10% of wage earners are spending 50% of the retail sales. Is their spending going to shift at all? Are they going to be saying, okay, that was really brutal on the downside. We have a respite here and I'm just going to go back to behaving in terms of my budget the way I did before. Or is someone going to say, you know what?
this is really screwed up and I need to maybe call a timeout on my spending. And instead of going out four nights a week, maybe I'll go out two nights a week or three nights a week. I'll be watching for that. I also want to see what the progress has made on extending the tax cuts. And at best, they stay the same. Can they throw in, okay, no tax on tips or whatever? Yes. But to me, that's...
not enough to make a difference. I want to see the level of government spending because the more government spending cuts we see where long-term, that's a good thing. Short-term, that's going to be negative for growth.
If upper income spending's knees buckle, if government spending is deep, again, the cuts are deep. While it needs to happen, the deeper they are, the negative it is for growth. And I want to hear what the hyperscalers have to say about AI spend. I know Google's AI chief talked about spending the same amount. I want to hear what Microsoft and Meta and Amazon have to say. Is there any change on that?
any softening, well, that breaks the AI capital spending growth rate because that's been also keeping up the economy. So these are the things that I'm watching for in order to determine, because if these things start to roll over,
Putting aside the tariffs, then you obviously raise the odds of a recession. Then earnings get cut. Then you have a lower multiple on those reduced earnings. And then you're going to have lower markets again. And also, because markets are tied at the hip with the economy,
you know any breakdown again in the stock market when will then have a negative impact on the economy so uh these are the things that i'm watching yeah and the other thing is you know the housing market's stuck it's just not getting any better right and even if you had a 10-year you know down at you know where it was at you know four percent or something like that given all of what we know about tariffs and and what might be happening with inputs from you know lumber and stuff from canada i mean there's a whole host of things right um
The housing market is not picking back up. So you talk about this kind of uncertainty on the high end sort of consumer or, you know, you know, middle earner or something like that. I just think that the wealth effect that, you know, we've relied on for a few years as it relates to housing and the stock market is just not going to be there. The likelihood that the S&P is back above six thousand anytime soon, in my opinion, not particularly great. Last thing I'll just say is and I know you look at technicals and I'd just love to get your quick take here before we get out of here.
is that we're still in massive downtrends in almost every risk asset that's sold off. So when you look at today's S&P move, we've just filled in the gap, I think, from Wednesday to Thursday, but we're still in a big downtrend. So if there's no material change to the economic outlook from just Thursday, you know what I mean, and we get a better read on this on earnings and the like here, I just can't imagine that this is a sustainable sort of point to rally from.
The level that everyone should be watching is 5670 in the S&P 500 because that's where we closed 4 o'clock April 2nd, right before the Liberation Day press conference started. So if we tanked because of the reciprocal tariff board that was given to us,
And now the tariff board ex-China is sort of being wiped away. Well, if we can't rally back to where we were on that day, well, that tells you something about
health of the market going forward. No doubt about it. Okay, we're going to get a great look at this as we start earnings season with JP Morgan. I think Wells Fargo is also that morning, maybe BlackRock and a couple other money center banks. So it'll be really interesting to see what Jamie Dimon has to say because it sounds like he was fairly influential in changing the president's mind. Jamie, when the market was going up for the last couple of years, was a bit cautious. I suspect on
the way down. He was probably less so, but he had to kind of step in over the last kind of day or so. But it'll be really interesting to see how his mood has changed with this sort of rally that we've seen. Peter Buckvar, we appreciate you coming back two times in a day. Stick around for Peter's conversation with Guy Adami. They cover a lot more than we just did. And it will be interesting to see what they had to say prior to this move. So, Peter, we really appreciate you being here two times. Thanks, Dan. Great to be talking with you.
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You know, I read your stuff religiously and what's been playing out over the last couple of weeks and specifically what's been playing out over the last 48 hours or so, I think are things that you've been concerned about, things that you've been writing about, things that you thought had potential to happen in the last couple of weeks.
But I don't think any of us thought they would all happen in concert, or maybe that's the way it's supposed to take place. So let's sort of break this down a little bit in terms of the things that I've been concerned about. Recently, we saw 10-year yields go down to about 3.8% on the back of a huge market sell-off.
And I guess in a perceived flight to quality to U.S. bonds and the thought that in a slowdown yields needed to be lower. On Sunday night, I tweeted something. I said some of the fact that wait till the market figures out they need to be selling bonds here and not buying it. And, you know,
You know, last night and when I'm saying last night, so on Tuesday evening, we saw 10-year yields go north of 4.5% in a move that, you know, I don't think I've seen in my lifetime, sort of the speed of the move. So let's start with the bond market. I think this makes sense to you, but sort of break it down for the listeners. So you're right. When we broke below 4%, it was your standard treasury trade.
We're worried about a recession. Growth is slowing. Stocks are dropping by treasuries. But I think what we've seen since is sort of reminding us that this is not necessarily the old days of what that standard playbook trade was. The situation is much more complex. You have the situation with tariffs where we've essentially...
pissed off the entire world, and the rest of the world still owns 30% of US treasuries. We have the dollar that rather than strengthening on tariffs is weakening. So for every tick down in one's currency, if you are a foreign holder of treasuries, you're losing money twice. You're losing money on holding the treasury and you're losing money on the currency. Then of course, people are talking about
the deleveraging with this basis trade where
The trade was buy treasuries, buy cash treasuries, short futures, create a little few basis points of spread, lever it up and get a risk free return. And now we're sort of delevering that to some extent. I think it's tough, though, to know to what extent. I did see Torsten Slak wrote about this this week that he thinks that that trade is like $800 billion. So it's not small.
I also do think because we're seeing a lot of weakness in muni bonds, too, in addition to our parts of credit. And I have some people speculating to me that some of this is ahead of April 15th tax day where people are selling their holdings to raise money to pay their estimated or their their final tax return. So that could be also exaggerating things here as well.
All right. So potential for exaggeration into that date. And I'm with you on that. We've seen it before. But let's sort of break down in terms of what this what you think this means. You talked about the dollar weakening in the face of yields going higher, which is something Japan's been sort of dealing with and not particularly well. And something the United States really has never had to deal with over a protracted period of time.
But the bond move, I think, should be scary. And one of the reasons is, you know, you get into a global trade war and I'm using that term by choice.
The problem with that is we don't really control our own destiny. The Chinese are the second biggest holders of our debt, I believe, Japanese being the first. And if they want to be somewhat spiteful, if they want to escalate, there's a potential for them to sort of sell treasuries, not buy as many treasuries, all those different things. And that does not make for sort of a healthy recipe. So
Break down how you think that's sort of manifesting itself. I think it does matter. I mean, what the Japanese can do, I'm sorry, the Chinese, because the Japanese may be less inclined right now, but the Chinese, what they can do is they can actually maintain their holdings of U.S. treasuries, but they can front load it. They can just own T-bills.
So any duration they have, they can do sort of their own operation twist, right? Or they can sell long and they can just buy T-bills. So they have short duration paper. So if there's any sort of broader risk between China and US, they're all in short term paper that's constantly maturing. So that's something that they can be doing as well. Then, of course, you have the debate about what's the inflation dynamic.
with tariffs and how does that flow through a holder of fixed income? One of the interesting things is if you look at the two-year break-even, inflation break-even,
it's at the highest level in about two years. If you look at the 10-year breakeven, it's been sort of trading in a range, just a little bit above 2.25%. So it's that belief that the tariffs are only a short-term thing and there's nothing sustainable to that. Now, how that's flowing through the whole curve, I don't know necessarily people are trading the 10-year based on two-year breakevens, but...
But also another thing here is, you know, you talked about how quickly we've risen in yield. I think the liquidity of the treasury market is drying up to creating a much more gap year trend.
result with wider bid offer spreads that is resulting in these big moves in short periods of time. And we're seeing that in this move index without question, which is exploding in a similar fashion as to the VIX. And we'll talk about the VIX and what you think that means in a second. But I don't think it can be overstated. The volatility of the United States bond market, we should not have that kind of volatility
and the largest economy in the history of the world, in my opinion. I mean, this should be trading in a far more liquid way than seemingly the ranges suggest, which leads me to my next question. There are obviously major forces at work here. I think a slowdown is sort of now in the cards. I mean, you have more and more people talking about a slowdown, a reset, whatever word you want to use. So that's one side of the equation. The flip side of that equation is continued problem that inflation has been...
bringing forth. And obviously, what we talked about earlier, the lack of demand for U.S. treasuries for a myriad of different reasons. And that's, I think, why yields are moving the way they are. My question to you is, what force do you think is going to win? Is it going to be a slower economy, which suggests yields should go lower? Or is it going to be the flip side of that coin, which has been my concern all along?
I think one of the factors on the lack of liquidity just broadly is definitely self-imposed. I mean, the Volcker Rule definitely limited the ability of banks
to take on inventory. So that right there, I think, dried up liquidity in a lot of different parts of the credit market. I think to your question, I'm in your camp. I think we're in a bond bear market. And one of the interesting things about today's action is it's not just the U.S. 10-year yield that has jumped higher. The gilt yield in the U.K. has jumped higher. And book
BUNs are actually the safety trade today. BUNs and JGBs. But other yields in Europe have risen. There were spikes in Australian yields overnight by 12 or 13 basis points. In New Zealand, after they actually cut interest rates on the short end, they saw a jump in their 10-year yield. So I do think that
investors overall are reassessing their holdings of sovereign bonds generally. And then that begs the question of, okay, well, where else are they going to go? I'm sure you've gotten that a million times. Where else are they going to go? Well, there are other places to go. They're going to gold today. They're going to gold today, guys. That is certainly an asset. And they can just go to the short end of the yield curve. They can buy
one-year paper in any of these markets and just feel much better than having to take any duration risk whatsoever. You brought up gold, and I'm looking at it on the screen. And I've talked about the potential to walk in one day and have gold $100 higher. And
We actually are seeing it today. Today, again, I want to be clear, being Wednesday when we're talking together. But with that said, I think the gold market has been sniffing out all this for quite some time. And gold has been working with yields going lower, yields going higher. Conversely, dollar higher, dollar lower. It doesn't seem to matter. I mean, it's not impervious to broader market sell-offs. And it has sold off along with other risk assets. But the sell-offs are
basically very short-lived in terms of duration, and it gets right back on its horse. And you've had central banks buying gold now for the last three and a half or four years, I think sort of front-running what at least some of them saw as the inevitable. But let me ask you this question, and I don't want to take you down a political road. This is not my intention, but I think there might be something going on with this, and I might be on to something. Last week, I believe President Trump
declared an economic emergency. By the way, I don't know what that means, but I think he sort of put it out there. So with that as a backdrop, obviously this is a president that has openly talked about the Fed's need to lower interest rates and to stop being political.
I believe he is setting up a situation where if Jerome Powell or the Fed doesn't acquiesce, he's going to try to fire Jerome Powell for cause. And the cause being we're in an economic emergency. We need rates lower. Just given that, I'm not asking you to sort of opine on whether or not you believe that. But if that were to take place, what does that do to the bond market, in your opinion? If you want to lose the confidence of not only domestic investors, but the world, then
you do something like that. Wasn't it in Nixon fired the prosecutor and it was a Friday night massacre, I think they named it. It would be that sort of thing that
I wouldn't be surprised led to impeachment hearings and a whole variety of legalities that would just be a complete mess. Yeah. I'm not hoping for it, but I'm just trying to sort of read the tea leaves here. And, you know, I think that economic emergency was put out there for exactly that reason, because.
Outside of that, the only way a sitting president can fire a Fed chair or a Fed governor or official is for cause. And cause, by the way, is not them disagreeing with your view on interest rates. Cause is for, obviously, other things that I don't think we've reached that level. But I just wanted to put it out there, and I've put it out there on Fast Money as well. But let's talk about some other things that have been going on and some of the moves that we're seeing in terms of the VIX. But
the damage that's been done to the broader market technically. I don't think that can be overstated. So we might be at levels now where theoretically the S&P is set up for a bounce, but what does your work suggest now with the amount of damage that's been done in a very short period of time? So helping to define that damage is we're, of course, trading well below the 200-day moving average.
And I forgot who said it. Maybe it was Paul Tudor Jones that nothing good happens below the average day moving average. It seems that the market is sort of hovering around this round number of 5000 in the S&P.
You know, I think one of the challenges, because I think it's important to differentiate the S&P with other markets, not just within the U.S., but internationally, because the S&P, in my eyes, started to become really vulnerable when that deep seek news came out.
And all of a sudden, and there were some issues going into that. You know, the end of, you know, back half of last year, people started to question all this AI spend and whether companies are going to see enough revenue to substantiate it. So those questions started to be asked and people started to wonder. Microsoft started to underperform.
Because they were spending the most and their robust cash flow was shrinking. And what became a cash-generated business ended up being a capital-intensive business. So I think that was sort of the setup. And then the deep-seek news was just sort of the knockdown punch.
And so all of a sudden, you start to lose 30, 35 percent of the S&P. Obviously, Tesla had its own issues. Google's search business is under a threat from chat, GBT and others. So all the questions being asked, Apple not seeing the hope for Apple intelligence upgrade. So a lot of chinks in that armor. So you lose 35 percent of the S&P. You know, you got some issues there.
And then you throw in, of course, everything else that's gone on with with tariffs and the threat that has to economic growth. What the slowdown, the intended slowdown of government spending is going to have on the economy, earnings, profit margins. So it almost is creating this this perfect storm. So it tells me that.
if you add this all up together, on top of multiples that were trading just below the S&P forward earnings estimate in March 2000, when we were trading at 24.5 times forward, we came into this year trading at 22 times. So we had no valuation support. We're losing leadership. We have now threats to earnings and profit margins. And
You throw in also the tariff disarray, and this is what you get. So you have to believe that the market's not bottoming. First of all, we don't even know what earnings are going to come out at. Is it 275? Is it 250? Is it two and a quarter? God knows what earnings are going to be like. But I do know people are going to want to pay a lower multiple for whatever it is.
See, that's the rub. And the pushback that I will get is it's not that simple an equation. And I'm not saying you're saying that, by the way. This is something that I've said. But to a certain extent, it becomes that simple. And you just pointed out where we were trading it and the historical levels that we're at. And by the way, I don't know how many times I brought up the fact that Warren Buffett
would now have $335 billion of cash, the largest he's ever had. That Buffett indicator traded north of 210%. He gets concerned at about 130%. By the way, still elevated in terms of the Buffett indicator, still elevated in terms of CAPE ratios if you want to go down that road. The reality is the market's going to have to try to figure out what is the right multiple in the environment that you just talked about. And it's not ridiculous to think we could see a mid-teens multiple
given that we're probably going into a bit of a protracted slowdown. And then you have to take into consideration those $270, as I used the term earlier, is an absolute pipe dream. It's just not happening. So I think you got to do the math accordingly and figure out where the sort of, I guess the overshoot could be to the downside. But let me ask you this, because one of the pillars of this bull case for a long time has been CapEx spending. And I've used the term the sanctity of CapEx.
My point is just because companies say that there's going to be capital expenditures doesn't necessarily mean that they're going to come through. And if companies start to see a slowdown,
One has to wonder if you're going to start to see a pullback in the amount of CapEx that's been sort of talked about. Thoughts on that and the importance of that? I'm going to touch upon that one second. I want to comment on also valuation. The dividend yield on the S&P, no one talks about the dividend yield, but it's an important part if you look at history of total return. Going into this year, the dividend yield in the S&P was 1.3%. There was no dividend cushion either.
So that was also a problem. Now, if you came into this year with the S&P at 15 times earnings and a 3.5% dividend yield, you have some shock absorbers. We came into this with sort of like,
driving a car and the brakes stopped working. And it was just a question of where you were going to end up, in a soft patch off the side of the road or into a multi-car accident. Now, with respect to CapEx, the interesting thing about CapEx in the U.S. over the last couple of years
It's been dominated by CapEx on anything related to AI. CapEx XAI has actually just flatlined for the last couple of years. If you look at a company's sort of CapEx pie related to technology, rather than AI expanding the pie, it just took a piece from spend on other parts of that pie.
So if you look at, if you listen to some companies, like I love to listen to the quarterly reports from CDW. It's a major technology distributor that sells into basically every technology product, whether it's storage and servers and security and PCs and data servers and this and that, selling into all different things. You know, business has been very mediocre, X, anything related to AI.
One of the most interesting things, and to your point going forward from here, is we know after last quarter, all the hyperscalers basically said we're maintaining our capital spending plans. That was ranging from call it maybe $12 billion a quarter on the low end. And then you had, I think it was maybe Amazon in the upper end, like $20 billion a quarter.
what Satya Nadella said last week in his interview with Andrew Ross Arkin on CNBC was our spend from here is going to be related to the GDP growth. In other words, if GDP growth slows, if
If concerns about the economy slow, his AI tech trade spend, I'm sorry, his AI capital spending plans are going to slow. And I don't think, and I think you would agree with this, even with the move we've seen in these individual names, I do not believe that is priced in at all. I think people are still clinging to that. So let's sidebar that for a second. You will not be trading over $100 if Microsoft says we're cutting capital. That's right.
That would be, that would be in a word catastrophic for, and you know, Dan and I have sort of, we've tried to sort of dissect that and try to explain to people why some of the numbers don't make any sense. And, you know, over at least since January, that's all starting to come to fruition. So let me ask you this question, because I have pretty strong views on this.
I think there's a belief in this administration that, well, first of all, I think it's a president that looks at things through the lens of wins and losses, which, by the way, is fine. I'm not saying that in a derogatory way. But when he hears that we have a trade deficit with
fill in the country. He views that to be, by definition, a loss. Now, a trade deficit could be a bad thing. It could be we're getting ripped off, but it doesn't mean by definition that we are. And to paint with that broad a brush that every trade deficit is by definition a bad thing sets us up for what the market is dealing with right now. Can you just speak to what trade imbalances really mean? It doesn't by definition mean we're getting ripped off.
Exactly. It's more of a byproduct of how much you import, how much you export. He's saying, OK, well, we have this massive trade deficit. Therefore, we're both getting ripped off. And it also implies that we're not exporting enough. But the deficit itself or a surplus is just two entities coming together and having trade.
And I wrote about this the other day. I'm getting my hair cut on Friday with my favorite person, Nicole, and I'm going to pay her money. She's going to cut my hair from a an accounting standpoint in services. I will have a trade deficit with her. She has a trade surplus with me. She is not ripping me off. And I'm going to give the example with Walmart, Walmart, because they do a lot of trade with China, who is supposedly ripping us off.
Walmart, I think they still are. Maybe Amazon's a little bigger, but I think Amazon is the largest private sector employer in the country, which with about 1.6 million people.
They stock their stores, a lot of it with products that they source overseas, particularly from China. Well, over many decades, China has benefited from that relationship. Walmart, of course, has, and consumers have. Walmart had the trade deficit with China. China's not ripping Walmart off because if they were, Walmart is strong enough, they would go somewhere else to buy their stuff. So when you are working off a false premise,
Yeah. Listen, you know, you use the example of your...
A haircutter, I use the example of a dentist, but it's basically the same thing. It doesn't mean we're getting ripped off. And I think there's a problem with that. And by the way, Peter Navarro has been out there sort of postulating about how we're getting ripped off. And I think it's flawed reasoning. The problem is that we're putting policy in place on the back of that. And I think that's why you're seeing some of the turmoil here without question. So
Again, this all comes back to, let's put it this way. If in fact those jobs do come back, and if we see some manufacturing resurgence here in the United States, and that's a huge if,
I would submit that that's inflationary as hell. And that just makes the dilemma that the Fed has created or finds themselves in the midst of that much more difficult. And I'll say this, when I was talking about stagflation a year or so ago, and you were talking about it as well, I know you got the side eye. I did. People laughed at it. Jerome Powell, a year ago, almost to the day when asked the question about stagflation, glibly said that he saw neither the stag nor the flation.
And I got to tell you something that might have been a clever response, but it was somewhat misguided. The final piece to that puzzle comes in the form of the job market. And I'm here to tell you, and I think you may agree with this. I don't think the market is prepared for a meaningful jump in the unemployment rate. Thoughts on all that? They're not. They should be. I mean, as we speak, Guy, you can imagine that global trade is literally freezing up.
freezing up. You have small businesses that are wondering that source product from China and other countries, Vietnam or whatever, that are wondering whether they are still going to be in business in 30 days.
So hiring people is just not front of mind anymore for a variety of these businesses. Now, can the local restaurant that's more insulated from tariffs and they're going to maybe hire an extra person? For sure. But broadly speaking, what is going on is literally freezing all decision making, all commitments, all spending plans that can be sort of tailed back. So
to the Fed, no, they're not prepared. The question, though, with the Fed is a couple of things. If you're Jay Powell, are you thinking, OK, am I going to bail out really stupid tariff policy? Is it going to be worth it for me to do this? Because if I start cutting interest rates and all of a sudden Trump wakes up in a different mood and he pulls them back and I just cut 100 basis points, am I going to have to then go hike 100 basis points on the inflation debate?
I think that, yeah, look at the two-year tips break even that I mentioned. It's north of 3%. Can I cut into that, even though maybe after the next couple of years, inflation drops back down again? I don't know. What I do know is the Fed will intervene here if everything hits the fan and everything freezes up. But they're not going to do it a second before. They're going to do it when we're in the midst of it.
So anybody who thinks now the market may be right. Maybe the Fed does cut five, four. Well, now we're pricing about four, four plus. So let's just say they cut four plus. Well, OK, if you're a silver plus borrower, maybe you're going to benefit. But I think you and I are in agreement that the 10 year yield can go to five percent under that scenario. And there are also broader risks. You know, the more that we sort of expand every possible scenario.
The upper income consumer has been a major contributor to economic growth. And one of the reasons is not just
up until recently, higher stock prices and higher home prices. It was the interest income that after 15 years in the desert with no interest rate water, they finally have 4% plus interest rate that they were able to invest their savings in. So take that person that has a million dollars of savings that before Powell was cutting, you know, was getting 50, making 50 grand on that. Well, Powell cuts 100. Now they're only making 40.
What if Powell cuts four more times this year? They're only making 30. Their interest income almost just got cut in half. At the same time, their stock portfolio has fallen. We lose that upper income free spender as a support to the economy. And also, let's take it another way. What happens if the dollar index breaks 100 because the Fed's cutting interest rates, makes U.S. treasuries even less attractive, and the dollar index goes to 90?
Well, you can be sure that that inflation expectations will jump on that. Maybe oil goes to one hundred dollars or even 80, which is a big move up from 60 here. And other commodity prices jump with it, with with with a tank in the dollar. There are so many possible repercussions to this. And the point is, is that prior to covid.
And actually, prior to the inflation burst, the Fed was able to get away with anything they wanted to do, any experiment they wanted to pull off, zero rates, overseas negative rates, QE, whatever, because inflation was always low. Their ability to confront challenges that we may have right now, whether economically or financially in the markets, they are much more limited in their ability to react.
Well, you said it better than I could, which is typically the case. I would say this, and I've said it to people, you know, the administration should go knocking on your door or calling you up because you
your voice that needs to be heard more broadly and listened to more because you've been pretty much right about everything. And now the unfortunate reality is I think you found this yourself on the way up. Nobody wants to hear these things because they get seduced by a market that seemingly never goes down on the way down. People are looking for people to blame. And why didn't you tell me? Well, you know, you're one of the people that have been saying all of these things for quite some time. So it's always great to have your voice. Thank you so much, Peter.