Idle Markets Are The Devil’s Workshop
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Welcome to the Risk Reversal Podcast. Guy Adami. Today I'm joined, of course, by the great Elizabeth Young-Thomas. We were just talking before this morning's show and said, you know what, not a lot really happening this week. Not all that much earth-shattering news. And I said to Elizabeth, you know, it's like that first date. Like, if you're not vibing, like, why bother sticking around? Like, just...

Call it a night early. Go home and watch the Ranger game. How are you, Elizabeth? I'm good. I mean, I wouldn't have gone home to watch a Ranger game after a not good first date, but I used to have a rule when I was dating that on a first date, I never agreed to dinner at

I would just do one drink and I always ordered one glass of Prosecco because it was the cheapest thing on the menu. And if after that glass of Prosecco, it wasn't working, I was out of there. That's it. And I got to tell you, the guy I married on our first date, I agreed to a drink and dinner before I had even met him in person. So it's like I knew. Well, wait a second. That's interesting. So what were you what was the thought process? There was like you had some sort of like.

was it an instinctual thing i think well i mean we had talked a decent amount before the date

Andy had to travel all the way in. There was a lot of effort put in. So I thought it would be a good idea to agree to more than usual. And it was a good idea. It all worked out. Well, it's a good idea that we're doing this podcast here on a Tuesday after a long weekend. Last week, we saw an S&P 500, which basically made a new all-time high. I mean, I'm not going to equivocate. I think the all-time high was

61.28 at one point. We got up to 61.27. So as they say, close enough for government work. I mean, everything seems to be intact here. The bond market, we saw yields obviously get up to, I think, at one point, 4.65 or so, pulled all the way back down to 4.40. Now here we are at 4.52. So

Things are relatively tame here. And as I said, you know, not a lot of macro news on the docket. So what are your thoughts sort of in the rear view mirror? And as we move forward this week? Yeah. So you mentioned the tenure. It got up to 465 on that CPI day. CPI came in hotter than expected. And then last Friday, we got some pretty disappointing retail sales. And that was maybe not a huge harbinger of bad things to come, but, you know,

Frigid January was an explanation that people used. I don't know if that really counts. I mean, how cold is it in your living room when you're shopping online? Probably not very cold, but we're always going to try to explain it away in a lot of different ways. This week, there's not a whole lot of macro news of consequence. And we talked about this before the show, too. Not a whole lot of earnings going on either.

The thing about that is that you want to say, okay, so then maybe it'll be a pretty quiet week. There won't be a lot going on. The market will sort of chug along. But these are the weeks when the market is left to its own devices and investors are left to try to figure out what to do with themselves and decide.

there's a saying, something like an idle mind is the devil's playground. So this is a week where investors are going to be wondering, should I be trading? Should I be doing this or that or the other thing? And as we know, as has been the case in this administration so far, never a day without a big headline. So you just, you never know what's going to happen. And there's no big news, nothing on the docket to take us in one direction or another. So this could end up being one of the more exciting weeks, despite the lack of news that we know is coming.

Okay, I'm sure I'm going to upset Amanda here, but what I'll tell you is the Idle Minds were my roommate's band in college. My one roommate, then a few other guys, made a band freshman year. They played all through our college tenure, and they will be playing on John Carroll weekend in April of this year in Philadelphia, sort of an Idle Minds reunion. And I think as the saying goes, the other one is Idle Hands are the devil's workshop.

But I digress a bit. So let's just go back to that CPI print, because I do think that surprised a lot of people. Obviously, rates moved to the upside. And then in the subsequent day, PPI was definitely hot. But then the market sort of reversed and took, I guess, a closer look.

and came up with the conclusion that some of the components of PPI were actually a lot better than thought. And they sort of did the math and suggested that, wait a second, with these components, with these inputs, things are actually sort of softening up on the inflation front. Is that the right read by me?

Well, some of the stuff that people look at, you look at the super core, which is core services, X shelter. So if you take out the problematic components and you've heard me talk about this a lot. Yeah. If you take everything out, that's a problem. And you look at what's left, it's probably not going to be a problem. But if you take out things like shelter and car insurance that have been ailing us for many months now.

both of those, and here's some of the premise, both of those are very slow moving components. So there may be forces in the economy that can bring them back down, but they lag there. The movement in them legs by months, sometimes six to nine months at a time. So even if you see shelter prices coming down, you may not see it reflected in CPI for a while yet. So there's this idea, this optimistic idea that over time it will still come down. The other piece of it was that if you look at, uh,

wage growth, you know, wages have not become a problem again. Now, they haven't necessarily come down, but they haven't become a problem. So we've worried about the wage price spiral, which is the idea that as wages rise, companies have to pay workers more in order to keep them or in order to get them. And then they have to pass those costs through in the price of their products. And then you get this sort of feedback loop that continues to drive inflation higher and higher.

Now, we've heard a lot of headlines about things like eggs, right? Egg prices are up again. So we've got some little whack-a-mole issues in food prices and in some goods prices. Usually those are pretty transitory. And there aren't that many components. This is the last piece of this puzzle. There aren't that many components anymore that are

showing an inflation print above 4%. So there was a time where we had a lot of components in CPI that were showing inflation above 4%, keeping things elevated. That has gone down over time. There's still quite a few between 2% and 4%, but not nearly as extreme as it was.

Fascinating, because with all that said, the Fed is still seemingly on hold, I would imagine, moving forward. And I think that's what the market's sort of struggling with. And I think one of the other things the market is dealing with, and this was a Wall Street Journal article, and indulge me for a second, bearishness among individual investors reached 47.3% for the week ending February 12th, basically last week. According to the latest survey from the American Association of Individual Investors,

That's the highest level since November of 2023. Now, it's interesting that here we are, as I mentioned earlier, at all-time highs in the S&Ps, effectively all-time highs of all risk assets, yet pessimism is the highest we've seen in quite some time.

I would attribute that to sort of the uncertainty around tariffs, tax policy, some of the uncertainty in terms of what's going on with these government policies and stuff. Thoughts on that?

Well, I'm just looking, I'm pulling up a chart back to 2023 to see what happened after people got bearish. So I'm looking at a little dip in the S&P and that happened at the end of October 2023. And then we went up from there, seemingly uninhibited.

So I wouldn't put too much stock in some of these surveys. I mean, I do think that we've had we had obviously a rough end to December, a little bit of a bumpy January. And we kind of had this flat moment for the S&P for about a month and a half, which is not what people were used to after a lot of gains through fall and into the election and then therefore afterwards.

So the bearishness, I think, probably has a couple of things to do with the fact that valuations still seem high. Everybody knows this story. We continue to talk about it. We've got a Fed probability of 1.9%.

of a cut in March. So that's probably not happening. And we don't actually have a full cut priced in now until September of this year. So that would be no movement out of the Fed until September of this year. And then it's really only a 50-50 chance of a second cut this year. So by the time the market expects another cut, it's not until the end of 2026. So

So we don't have the Fed at our backs pushing things forward. And I think people are just trying to do the math of, all right, what are the tailwinds that we can count on here? We still, I think, can count on economic fundamentals today. Everything still seems pretty strong today, or at least solid.

earnings have been good, not exceptional, but good. They've surprised to the upside. Guidance has been a little bit more uncertain. And I think that's where investors and companies are aligned is that we don't know still how all of these policies are going to shake out. We don't know how the geopolitical situation around the world is going to shake out. There are a lot of different forces going on, not just because of tariffs. There are a lot of different uncertainties going on because of wars and tensions.

between multiple different countries and regions. And we've got really the question of how much has the Fed been the tailwind this whole time and how much more of this can we absorb without additional liquidity?

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What do you make of the job market here? Because obviously some huge government cuts coming. I read something over the weekend.

Four out of five government workers live in the D.C. area, housing in the D.C. area, the most inventory on the market in the last few decades or so. Now, that's obviously anecdotal, but one has to wonder, does this affect the job market? And if so, you know, what potentially could mean to the economy? Or is this just sort of

um, not big enough to sort of make a dent because although the unemployment rate is, you know, 4% and, you know, I think we would all sign up for that in terms of where we are on the calendar. There are a lot of things again, under the surface that continue to be concerning.

So I think it's big enough to affect the job market from an optic standpoint. I don't know that it's big enough to affect the numbers, at least not yet. And remember a couple of years ago when we had a bunch of tech layoffs and they seemed very dramatic, but it never showed up in the unemployment data. It never really showed up in initial claims. It never showed up in the unemployment rate. And that was a head scratcher until I think we all figured out that, number one, the effort that it takes to go through filing for unemployment is

is often not worth what people would get from actually doing the filing. You get, I don't know, what is it, $450 a week maybe, and that's at the top end of what you would have been making. So depending on what those layoff packages look like, and in the tech space we can only assume that some of the layoff packages were actually pretty attractive, so you're making more, you're doing just fine as a laid-off employee,

The thing that would be different about government work is that many of those tech workers, if they were located in California, had other options. They had other places to land. There were a lot of other things going on in the tech industry, obviously this AI revolution going on.

there were probably other jobs available, maybe not for all of them, but there were other jobs available. If you're a government worker and you have a very specific skill set, a very specific career path, where else are you going to go if everything in the government is getting cut? So there may be a lot of displaced workers with a skill set or with a background that doesn't match with some of these other jobs. And we've talked about this, I think it was a couple months ago, where this was on the topic of immigration,

If you deport a bunch of people that were in jobs of a certain type, but you also have a lot of unemployed workers that were in jobs of a completely other type, you've got this big mismatch in the economy where maybe you've got open jobs, but the people that are available to fill them are not the ones that are going to take those jobs. So you end up with kind of a frozen labor situation. I don't know that these government layoffs are going to be big enough to create that.

but it could be a lot more of a stick in the mud than what we saw in the tech industry a couple of years ago. Definitely something worth watching. I think you would agree with that as well. And again, there's been so many...

The potential knocks on the labor market over the last couple of years are theoretically what should have been, yet we continue to hang in there. And when you look at the headline numbers, one would submit we're in an incredible job market. Then again, there are other things that suggest we're about to sort of tip over to the wrong side of the equation. But I've thought that for a while, and yet here we are.

So we'll see how that plays out as well. There's something else that's been in the news, and I'm sure this has captured your fancy over the weekend. You know, these calls for an audit of Fort Knox and the gold market, which is something that you've talked about for a while. Obviously, we had a huge up day on Friday, only to see it reverse pretty meaningfully to the downside. Yet here we are sort of bouncing back.

I have my own thoughts on sort of what an audit means and things. But when you hear cries like that from people seemingly in positions to do something, thoughts on the gold market here and potentially, is this the next catalyst to the upside?

I do think it's probably the next catalyst to the upside. I'm just trying to pull up what gold is doing in the pre-market. I think it was up earlier today. But yeah, so yeah, it's number two on my list of ETFs that I track, only beat by the China large cap ETF FXI. So physical gold up about 1.3% in the pre-market right now. There have been a lot of cries about gold having outperformed itself, basically. Yeah.

over the last, even the last couple of years, particularly last year, it was beating the S&P through mid-year. And that's just not normal. Usually you're either buying gold as a short-term trade because there's fear in the market, or you're buying it as a cyclicality trade, an inflation hedge sort of thing.

I do think that there are a lot of different prongs to this gold trade. Now, has it seen a wonderful run already? Absolutely. But does that mean that it has to stop? I don't think so. And there's enough uncertainty in the crypto market still, although optimism, but there's enough uncertainty in crypto still, and it's such a young asset class.

compared to gold that I still think there's going to be appetite for gold. And we've talked about this a million times. The appetite isn't coming from the usual places, and it certainly isn't coming from what are called paper hands. I know you know exactly what that means. It certainly isn't coming from those. So it's coming from places that are intending to hold gold for a long period of time.

I've held gold for a long time already. I've talked about the fact that I got rid of the miners just because it wasn't worth the volatility and watching it swing so much. But I intend to continue holding gold. I've actually recently added to my position and I may add more as time goes on, depending on how some of the news shakes out with tariffs, with geopolitical risk, and particularly with some of the defense stuff that's going on in Europe.

Are you a fan of the late Charlton Heston by any chance? Roddy McDowell? No. I mean, I'm not an unfan. No. But it's like, you know, by the way, Charlton Heston portrayed, I think at one point, Moses. And he also portrayed somebody called Ben-Hur. But I digress. He was also in the movie The Planet of the Apes. And I only mention that because at the end of the movie,

Charlton gets on a horse with his girlfriend and they go out looking for things. And they turn to, I think it was Dr. Zaius or whatever his name was. And they ask him, what is Charlton going to find on his way across the shoreline? And he said he's going to find his destiny. Be careful what you look for. You might find it.

And that's a long-winded way of saying, you know, be careful what you go searching for with these Fort Knox audits because you might find it. And it's not that I don't think the gold is there. I absolutely think the gold is there. I think one of the things that they might discover is the amount of time that gold that's there has been sold and levered countless times. And I think that might be the real story. And they only mention that because if, in fact, that is true or anything

permutation of what they're looking for is true. Very bullish for the price of gold. I also think it's really bearish for the bond market. So, you know, be careful what you go looking for, Elizabeth, because you may find it.

Yeah. And you know what? You mentioned the bond market. That's an interesting topic. I've been hearing people talking about, even just from a long-term perspective, because this is the theory in portfolio diversification, that you should buy bonds as the diversifier because it should offset equity volatility. I don't know that that's going to be the case, given what you're talking about now, and also given just inflation data. And look at the volatility that we saw in the 10-year treasury on one CPI print. So I

I think we have to be careful about diversifying the portfolio in the traditional ways right now. That said, I do own some treasuries and I own them 10 years and under. I do own the belly of the curve. I own the short end of the curve in a number of different ways. And I do have one seven to 10 year ETF portfolio.

ETF as well. But I don't expect that it's going to completely offset equity volatility because I do still think that there is a risk of stagflation out there. Well, yeah, you mentioned equity volatility. It's definitely equity volatility has been there in spades in terms of individual names. And Dan and I have talked about this and we probably brought it up with you

Last week, we've probably seen a couple of dozen names, and not small companies, by the way, have moves of 15% to 20% both to the upside and to the downside on the back of news. Typically, that news is in the form of earnings, yet here we are with a VIX.

at 15 and a half so you know we're seeing obviously volatility in underlying names but for whatever reason it hasn't made its way into the broader market again i will say i think it's just a matter of time and there have been a few times over the last six months where

It's reared its head. I mean, we obviously saw it on August 5th. We saw it a couple times in December in terms of the VIX spiking. But with the VIX down here at 15.5, given some of the moves we've seen in individual names, for me, I think it's just a matter of time before the broader market VIX catches up.

Yeah, one of the interesting things I put in a column a few weeks ago, Mario uncovered this, was that investors were expecting tail risk, but they were expecting it on the upside, not on the downside. And that the put call activity, there was a lot more activity in calls than there was in puts. So people expecting there to be these outsized, unexpected gains, but on the upside, and not so much protecting against some sort of tail event on the downside, and

That presents a couple different risks. Number one, that means that a lot of people are probably positioned for things to go really, really well and not positioned to protect against things going poorly. The VIX

measures over a 30-day period. So when you've got these one or two-day events where you've got one or two stocks that are up 15%, 20%, maybe some people benefit from that, and that's great, but it's not going to bake into what the VIX is showing us, or at least not entirely to bring the number up enough. So these little outside events, I think, are happening as some investors expected, meaning tail risk to the upside. But there's still, I think,

an outstanding risk of tail risk broadly to the downside because of some headline we didn't expect or because of some industry, particularly AI, that could start to disappoint in a way that investors didn't expect. And this becomes an area of concern when you look at positioning. And I think there are a lot of investors, even if they're saying they're bearish,

There are a lot of investors that are still positioned quite bullishly on a handful of themes. And that's where you have to think about diversification. So this goes back to the idea of, well, how do I diversify? You don't just diversify with treasuries, especially at a time when we're worried about inflation rising. You diversify with other sectors in the index, the sectors that have not kept up. And that's why I've been...

banging on the table about things like health care and even some of the cyclical sectors that haven't gotten a bid, things like energy, where you're not paying a ton on a valuation perspective, but at least you're diversifying away from things that are so correlated to the same themes.

Something that I've been watching very closely is you mentioned the FXI, and let's just talk about that quickly. I don't want to get you bogged down in individual names, but obviously China has been a story again. So in the fall of this year, there's nothing going on in China. They obviously threw a considerable amount of money at their markets and at their economy, and you saw the FXI go basically from about 25 to about 37 or so, and that culminated

right around David Tepper started talking about it in October of last year. And that's not casting aspersions. That's just the way it's sort of lined up. The FXI did a complete round trip almost, but here we are back on the horse approaching the levels that we saw in the fall. And some of these individual names, for example, Alibaba has gone from about 81 to a buck 25 or so, by the way, they report later this week. So,

Thoughts on the importance potentially of what's going on, not necessarily in the economy of China, but in their markets, which have sort of reaccelerated here very quickly right before our eyes. Yeah, well, let's keep it in perspective too. We talked about the K-Web on Market Call last week. If we go all the way back to 2021, so this is early 2021, the FXI was trading at 54.50-ish, okay? So now here we are sitting at 35.00.

So if there's anybody out there looking at the chart recently, looking at a one year chart and saying, oh no, I missed it, right? There's been this big climb in the last couple months in FXI and now I can't get in anymore. Pull that chart out longer term and you'll realize that you're still probably in a pretty good position if we're headed back into the 50s. The other thing is when you look at charts of things like this and you can think about it as a country, as a region, as a theme, it doesn't matter.

You have to look for a bottoming process, right? Bottoming is a process. It's not a single point in time that we're trying to pinpoint because that's nearly impossible. But China as a whole, and you could layer on a bunch of their stock indices, you could layer on a bunch of the broader based ETFs from China.

had been chugging along at the bottom for the better part of two years. And there have been some dramatic dips there, but it just seemingly couldn't get off the mat for a long time. And it started to feel at least last year like, okay, we've at least hit the bottom. Not sure when it's going to spike up again, but then we saw that big change at the end of the year. You mentioned Tepper. So the announcement of stimulus and

My thesis on China, my main thesis on China has been since then and even before then that they are so committed to hitting their numbers. They are so committed to hitting their growth marks that they will stop at nothing.

in order to get there. And now all of those things may not be entirely transparent and perhaps not entirely legal, but they will stop at nothing in order to get there. So they started stimulating. They tried to do a little bit. It didn't quite work. It wasn't enough. It wasn't targeting the right sectors, but it targeted the stock market.

I think they will keep announcing stimulus systematically over time until they get what they need. And that has been the main thesis. The other thesis here, obviously, we got news about deep seek. So and it's not just that. It's the idea that China is a real competitor in that space. So that's why you saw the K-Web really show a lot of life again. And if China becomes a real competitor in that space, a low cost leader in that space, then

There's more optimism for the stocks. And I understand that this is a tough thing to buy as some investors because you may not believe in China's long-term story. You may not believe that the way that their economy works is set up for success. But the reality is if you're trying to buy this as a stock and you're trying to make money off a stock, this is probably still a pretty good entry point.

Yeah, I agree. Again, I mentioned Alibaba on Thursday. For those Fast Money fans, you will know that Baba is the bee in my tube. No reason to get into any further detail there. I'll say this, economic data, not a lot. I just want to sort of bring it up quickly. We have Fed Minutes tomorrow, initial jobless claims on Thursday, existing home sales and consumer sentiment on Friday. So not a lot to get excited about on that front, but something to potentially get excited about

comes in the forms of earnings on Thursday before the bell, and that's Walmart. I'm not asking you to opine on the individual name, a stock that seemingly has defied logic in terms of valuation, but one that we've liked for a while. But the importance of Walmart, not necessarily in terms of the stock market, but potentially as a read on the consumer, if any, Elizabeth.

I think it's a huge read on the consumer. And when you look at things, you know, from a retail perspective, Walmart's important, Target's important, Starbucks is important, Nike is important. And some of those fall into staples, some of them fall into discretionary. But just the big retailers that are bellwethers for what consumers are doing and what kind of behavior they're engaging in. We know that Walmart has been the beneficiary of

of consumers trading down through this inflationary period. We just got news that CPI came in hotter than usual, so we're still not out of the woods on inflation. There still is speculation about whether or not the Fed is actually committed to 2% or if they're gonna let it run a little bit hotter. I think Walmart will continue to be the beneficiary of that trade,

if consumers need to change their behavior. Now, you've seen a lot of different activity in retailers because of that change in consumer behavior. The challenge to any big box retailer, Walmart, Target, anybody, Macy's, all of them, is they're

to manage inventory the right way. And Walmart has a big grocery business. I think that has benefited their bottom line quite a bit. But managing inventory at a time when consumers are changing their minds very quickly because of forces in the economy can be a big challenge and can send earnings in one direction or another very, very quickly, regardless of

of what else is happening at the company. So that is always something to keep your eye on. But yet you're right, Walmart has been a standout. I'm looking at year-to-date performance up 14.5%, only beat by Costco, right? Up about 16% year-to-date. So those two seem to be the beneficiaries of consumers still treading lightly on the inflation front.

You will be familiar with this, and you mentioned Out of the Woods. You portrayed Dorothy in your high school musical Wizard of Oz, of course, 1939's Wizard of Oz. Dorothy, the Tin Man, the Scarecrow, Little Toto, and the Lion, they thought they were out of the woods as they saw the Emerald City, only to find themselves in a poppy field that was poisoned by the Wicked Witch of the West.

A snowstorm seemingly out of nowhere saved them. But my point is just sometimes when you think you're out of the woods, you find yourself in deep doo-doo. But I digress. Elizabeth Young Thomas, I want to thank you.

As always, you are the best. Mario, thank you for your work. I want to thank the audience. Big week for us. We'll be back with Elizabeth tomorrow on Market Call. Dan and I will be doing Market Call later today. A lot of podcasts to drop on the Risk Reversal Network. And I want to thank you folks for joining. We'll see you soon.