Welcome to the Dugout 2024. In this 15-minute segment Paul and Clint have a casual and semi off-the-cuff conversation about topics that range from Paul's upcoming visit to see Clint's Tar Heels play in the Dean Dome to their thoughts on “anyone under 80”. Conversation points include the Federal Reserve rate cuts, cash, employment, America’s spending, the S&P 500, the Magnificent Seven, cyclical fluctuation, playing the long game, old and new prognostications, pundits, and of course a dash of politics.
RECORDED JANUARY 19, 2024
Welcome to the Dugout 2024. In this 15-minute segment Paul and Clint have a casual and semi off-the-cuff conversation about topics that range from Paul's upcoming visit to see Clint's Tar Heels play in the Dean Dome to their thoughts on “anyone under 80”. Conversation points include the Federal Reserve rate cuts, cash, employment, America’s spending, the S&P 500, the Magnificent Seven, cyclical fluctuation, playing the long game, old and new prognostications, pundits, and of course a dash of politics.
RECORDED JANUARY 19, 2024
Hey everybody, this is Paul Borowsky from fat cage podcast. And I'm joined today by my co host, Clint Sorenson. And we don't have a guest today because this is another episode of the dugout. That's where you get to hang out with Clint and I, although we're not in a dugout together today, Clint, are we? Where are you today? After all?
Clint Sorenson:Yeah, I'm at home today. How about you, Paul looks like you're at home.
Paul Barausky:I made it home last night. This may be a rarity early in 2024. Never to happen again, the two of us are not on the road. I'm going back on the road Monday. And I finally get to go see your Tar Heels play in the deme dome. So I'm looking forward to seeing you and I have to buy some Jordans between now. And then I
Clint Sorenson:got two pairs. They're both my lucky pair too. We've been winning every time, you know, one a pair off, but I just think we're good this year.
Paul Barausky:Well, I'm excited for the Dean Dome. But back to baseball versus basketball. I think you and I were talking. Gosh, just the other day, as we get into the new year, I was thinking about my holiday season and digging out of it my favorite drinking game this year. And I know I'm too old for that stuff was how many rate cuts? Is the Fed going to, you know, put through in 2024. And I don't know about you, I look towards the end of the year when the you know, things were selling off. And the betting futures were six six rate cuts with a march cup. What do you have to say about that? Yeah, right
Clint Sorenson:now it's the Fed futures are saying a 50% chance of a cut in March. But you know, it's interesting. I think the Fed over tightened, I think they realize they ever tighten, especially as inflation came down so rapidly, which is a lot base effects, right. And then what they did was they opened up the ability to ease through communication in the market, because the dot plot went down, right, the central tendency went down to show three rate cuts on the dot plot. 325 basis point rate cuts to be specific. When that done five total. That's right, when that dot plot changed, the market just went crazy. And of course, you know, in the short term, probably went a little overboard. And you've seen that right rates have come back up to start the year. But yeah, they started betting on Hey, Clint,
Paul Barausky:thank goodness, though, that that yield curve, but I just look at the two to the 10. As you know, I don't care much about the 30 where I sit. But I mean, we were 120 basis points inverted. And now we're about 20. So to me, that's a lot better than where we were, even if we dove too far. And we came back up a little. And now we're kind of hanging around. Let's just call it four on the 10 and 420. And I didn't look this morning, I got in late last night.
Clint Sorenson:Yeah, I mean, look at the problems the banks had last year. I mean, that bank fact some of the biggest bank failures in history happened in 2023. That's hard to imagine when you had a lot of the AI craze and the mag seven running up and all the different things right, the s&p having a great year, NASDAQ having a great year. But essentially, if you look at the underlying fundamentals of our credit system, and our banking system, it was a tumultuous year. So the Fed was way too tight. I mean, the fastest hiking cycle in history. And that includes the Volcker year. So think about this wasn't a run of the mill, gradual tightening cycle. This was a very aggressive tightening cycle. And I think all Powell did, which was right, was say, Hey, we're probably too tight, real rates are high, we're gonna open up the door for rate cuts. And if you look at the economic situation, it kind of got downgraded, right, we're seeing growth continue to slow and it looks like first quarter second quarter going to be potentially flat to negative on a quarter over quarter basis. So I think the Fed just did the right thing, you know, opened up the door to being able to provide rate cuts. So I do think they'll cut rates. I think they'll cut rates. I hope they cut them in March. But I think they'll probably wait till the third quarter, just because of the way data is reported. And you're not seeing a lot of weakness and unemployment, don't
Paul Barausky:you? Oh, you don't think May is on the table?
Clint Sorenson:I mean, I think it's more likely they cut in the third quarter. Right? They automatically started walking back. I mean, it could anything could happen. I think a lot depends on how fourth quarter GDP gets reported. We did see some trouble employment, the household survey right 638,000 jobs lost in the household survey. So we are starting to see some cracks. But the labor markets still relatively tight. And you're just not seeing the data yet that they need to kind of in my opinion, to give them political clearance to start cutting rates. So I think you need to have some growth deterioration in the consumer. We continue to see just remains as resilient as possible even though delinquencies are rising on a year over year basis on credit cards and credit card usage is all time highs. Look they
Paul Barausky:they continue around Dallas and it's even hard for me to get a reservation on a Friday or Saturday night. I mean, what are you talking about? So I think one thing we know about America is the government. Businesses and the individual consumer are still gold medalists in spending money. Oh, that's the habit.
Clint Sorenson:Speaking of the government saying, I just we talked about this, I think on our last episode, but it is profound. Our deficits are already 50% over where it was last year. I mean, this is not like we're running amazing, unprecedented deficits when you look at where we are, from an employment perspective. So yeah, I mean, this is just the world we live in. I think it's prolonged, it prolongs in one sense, it condenses the cycle, meaning you get more cyclical optics and inflation and optics and growth followed by hawkish fed, which creates more downdraft, you get more cyclical fluctuation, but it does kind of lengthen the long term cycle where you don't really it's almost like we're Australia, you might not hear the word recession, announced, who knows, right. But I do think you get a lot of you do get more cyclical variation and more policy, volatility. And I think that opens up the world of opportunities in a lot of asset classes. Yeah.
Paul Barausky:Which brings me the I broke down three things to talk to you about today. But I will just close that section by telling you we heard higher for longer for all the last year. My theme now is lower will be slower than we're thinking and I might have to refine. So you know, given that everybody's doing their prognostications the last couple of weeks, right. And I was thinking about last year's prognostications, the biggest one everyone got wrong was China. Remember all the pundits to begin at 23 saying don't invest in China? What a colossal train wreck still
Clint Sorenson:look at this year. It's even starting off the year crazy. Yeah.
Paul Barausky:I was gonna ask you, what are you hearing from kind of the masses or the professionals? And what's kind of your opinion? What do you think we're looking at? Yeah,
Clint Sorenson:I mean, the, I think the fat pitch trades or investment thesis, as I think first of all, the fat pitch. And I think Nick said Mick Fusco said this in our call, to have duration in your viewpoint, right? Keep it long term. I think being long term is the bigger edge than ever before. I mean, I think it's hilarious, we go out and we try to predict calendar, your returns, I think we got to zoom out since the Fed started site started hiking rates since the start or the end of the growth cycle, which was the end of 2021. And honestly, the highest valuations we've ever experienced in the US, by many measures, deepest, risk free, negative risk premium, when you look at the s&p 500 compared to bonds, all of that kind of materialized in 2021. When you look at that period of time, as marking that as the end of the cycle, when the Fed started communicating, they were going to raise rates start to fight inflation, etc. Cash has outperformed from December, if you look at just 2021 through 2023. And of last year, cash outperform stocks. It was the right place to be right if that's hard to believe, because what happens is you have Yeah, like like stocks tanked in 2022. Right, especially the NASDAQ. And then they ran up. And I read a quote by Dr. John Hussman, if you I mean he's brilliant from a valuation perspective. But he said something he said the markets two years in a long journey to know where the s&p 500 not the market, the s&p 500, which is in this long road to nowhere where essentially the best returns it's going to experience are when it tries to catch up to cash. And I thought, Well, that's exactly what happened to deviated so far from cash to the downside and ran up really fast catch back up for
Paul Barausky:a sense of clarity let's really talking about the s&p 493 versus the s&p seven and you're talking to a guy that before he got into commercial real estate, multifamily then industrial was you know, with a momentum growth manager in New York City during the first.com bubble. So I think I've told you stories before about being a young 20 Something wholesaler going around big Merrill Lynch offices, marquee ones, and watching like the pets.com IPO and selling funds with Juniper Networks and JDSU interphase and global crossing and really I got to use to sky high valuations. Clint it's kind of funny fast forward. I would argue that chewy is the same business that pets.com was just maybe run a little better, we hope but really, you get AI and you staple in on it anywhere right? There's your seven and there they are, or you can be like a young man I know that left the company four years ago and left half his 401 K and and Vidya has never taken profits.
Clint Sorenson:I mean, it really is amazing. I saw Apollo to this chart and it was fascinating and it said that the mag seven which are Apple, Amazon alphabet nividia Tesla, and I forget the other two but the big companies right The Magnificent Seven. They are now have more market cap Then UK, Japan and Canada's equity markets combined.
Paul Barausky:That is, I gotta go find that
Clint Sorenson:that's a staggering statistic. But yeah, I mean, I think everybody's just myopically focused on this index, and it's the wrong index. And I think a lot of people they're gonna miss where the opportunities are always think we're has in this Fed rate hike cycle, whereas price discovery been the most profound. That's where the fat pitches sit, they're not sitting in the safe place they're sitting in, you know, think about what's been hit real estate, commercial real estate, been a lot of it's been decimated, and there's still more pain there. Because of a lot of the debt rolls banks have been decimated. Emerging markets. You mentioned China, a lot of emerging markets have been decimated, there's been price discovery, it just hasn't been in the s&p 500, which is dominated by really seven names, like you mentioned the s&p 493. I mean, there are so many opportunities now. And there will be continued to be so many opportunities, as long as the Fed stays overly tight because of credit contraction that I'm almost getting. And I think I'm really looking forward to our fat pitch guests this year. Because I think we're gonna definitely unpack a lot of these. And I mean, you start to think about globally, how to think shift with policy response. Now, deglobalization was something that was a theme on our first season and the fat pitch talked a lot about it. When you think about all these rising costs, regimes and rising geopolitical conflict, what happens? What does that result in? I tell you, I remember Tom holiday, talking about the supply constraints, a lot of key commodities and how he was betting on it from a thematic approach. I think those are some areas too, I think there's, I think the fat pitches are going to not look like the s&p 500, or the AI craze, not saying anything wrong with those, but I do think that it'll look more old world going forward. And I'm really excited about unpacking that. It's gonna
Paul Barausky:be interesting to see. Well, that goes back to investment managers, folks with disciplines and being able to find themes and then find examples that support those themes, which, you know, when I grew up being in my mid 50s, it's I went and looked for snipers that were good at certain things. And you put those folks together. And you know, it's been for those of you that like our podcast, we slowed down on recording as Clinton as I had a few medical procedures on my few rounds of chemotherapy. I looked at the end of it, like Evander Holyfield, and his prime had just pounded me for 12 Straight rounds. So we look forward to having a robust calendar of guests, and really building up this library of fat pitch folks in Clint, kind of wrap up this episode of the dugout about with my wife's favorite topic of conversation, so I never bring it up at home. And that's politics. I was doing a conference in St. Petersburg, Florida this week, where I froze my butt off. I thought I escaped Dallas when it hit teens or lower, it was 40 for a lotto in St. P. So I sat in my room every morning and watch CNBC from Davos. And I gotta tell you, it seems like everybody there including the CEOs are getting ready for a Trump presidency. Trump part two, that will you know, you and I are both kind of a political we look at what's the effects and cause etcetera, but you got any comments because I'll tell you what, if I see Trump I believe D globalization as part of that.
Clint Sorenson:Yeah, I mean, the rise of populism and you can't deny his base. It's massive. And at the end of the day, we just don't have in my opinion, five great options, but I'm a libertarian and art so I'm kind of a coward when it comes to this stuff. I stay politically
Paul Barausky:stay. That's why I'm hoping to spend my summers is ah, and then, you know, I got a campaign slogan out there. I told you I'm getting mugs made. It says 2020. For anyone under 18 years of age. Yeah. I mean, this is just baffling to me that in this greatest nation on the planet, you know, the joke I heard the other day is one guy could be in jail, and the other one might be asleep.
Clint Sorenson:Yeah, I mean, there's I don't I imagine there will be a surprise on the Democratic side, though. I mean, the the it's hard to imagine our president running again. In his current physical state, right, it's just, it seems it seems a stretch either you're either. Neither
Paul Barausky:of us are conspiracy theorists. We're just kind of sitting down saying hey, if I was sitting around my house at the holidays, and I had all my older aunts and uncles over who would I pick to go play touch football with me? So by neither for me, I'm selfish. I'd say one's going to hurt himself. Now there's gonna cheat.
Clint Sorenson:It's funny though. I think one of the things is resonating to your slogan which is the anybody under 80 thing which I love it I think it strikes a lot of Americans on both sides of the aisle, especially individuals who follow the money like me. You know, I think I'm not going to go as far as say it's corrupt, but it's absurd. And both sides are guilty of it. How these and I think this is why the base is so strong for Trump because he's you know, his slogan was I'm going after the quote unquote Deep State
Paul Barausky:an outsider.
Clint Sorenson:I'm not a politician I'm a drain the swamp and I think a lot of people are sick of seeing these politicians go in broke come out, where $60 million as public servants, you know, allowed to trade stocks with insider information. They live by a different set of rules. Yeah, the well well, wisdom. Yeah, of course. I mean,
Paul Barausky:this is a quotes Pelosi trade secrets for Republicans. Yeah. I was like, wow, some of these guys are really good options. Traders. Go figure. It's
Clint Sorenson:amazing how good their performance is. Got a lot
Paul Barausky:to unpack this. I'm Clint. I'm looking forward to just a ton of great guests this year. And you know, it's been a heck of a start to the year in January. So listen, everyone, thanks for tuning in to the dugout. Now you know what Clint and I do we really don't have much fun. We ended up talking about money and politics and a little bit of Tar Heel basketball and some Penn State football efforts man some Arsenal soccer behind me, but thanks, everyone, for tuning in the dugout. We look forward to seeing you on the next episode of the fat pitch people