The Fat Pitch

Fed Speak & Interest Rates

• Clint Sorenson and Paul Barausky • Episode 19

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In this episode of Fat Pitch, hosts Paul Barausky and Clint Sorensen discuss several pressing financial topics. They cover recent changes and expectations in Federal Reserve policy, particularly concerning interest rates and their impact on various markets. They debate the potential for rate cuts and the implications of current economic conditions, including inflation and labor market trends. Additionally, they explore the broader market shifts, such as the performance of real estate and other sectors, and touch on the upcoming election's potential impact on economic policy.


RECORDED SEPT 4, 2024



Paul Barausky:

Well, hello everyone, and welcome to the fat pitch Podcast. I'm Paul Borowski, your host, and I'm joined, as always, by my co host, Clint Sorensen, how are you today? Buddy,

Clint Sorenson:

doing great, man. It's finally good to see you in person, although we're not in the same room.

Paul Barausky:

That's right.

Clint Sorenson:

It's nice to get to hang out.

Paul Barausky:

Well, it's nice to talk to our viewers or listeners. It's been quite a hiatus for us. I've been very busy in my role at Sealy investment securities, and you've been very busy cobbling together a lot of different things. And for those of you who have not seen us or heard from us in a while, we took a little bit of a hiatus, and we've decided to rework the fat pitch a little bit, we found that our friends and colleagues and mentors are as busy as we are, so rather than have a guest each and every episode, Clint and I are going to try to come together once, twice a week, talk about the fat pitch, and then maybe once every three or four episodes, have a guest on from something that's relatable. We also noticed that there was no shortage of podcasts in the world. I think we would all agree with that. There's no shortage of bad or boring podcasts, and we want to remain in that top 10% all of them out there. So we're going to try to keep it a little bit shorter too, to keep everybody interested. So Clint we find ourselves today recording on September. Is it the fourth death and we are in for one heck of a week, because a lot is going on with interest rates, a lot's going on with the election. And so I thought for today, maybe we could cover three things. And the first would be, what's going on with fed speak. Where are we headed? Number two, what's changed in the election outlook. And then number three, what's happened in this rotation in the market? I saw one of my wife's friends, childhood friends, on TV today, former SEC litigator, talking about potential charges against Nvidia. So how do we tackle these one by one, and start with the biggest one, fed speak and interest rates? Yeah. I mean, I

Clint Sorenson:

think that's the big topic, right? The Fed has really controlled the business cycle environment for a long time, and that control has only grown in terms of the influence. Now we hang on every word, but I think Jerome Powell made it pretty clear. He left open the path break cuts, which is very smart. He essentially said, job well done on inflation, which was just allowing time to create the disinflationary pressures, the tight monetary policy, which worked. And then he said his new focus was going to be on the labor market. So it was a acknowledgement of the weak labor market, which we something. Paul you not talks about a lot, right? Heavy subject to heavy revisions. Those revisions were all downward, yet 818,000 jobs come off the headline numbers that were reported in the BLS adjustment that was enough for the Fed. If you look at that, that's, you know, slightly over 100,000 new jobs per month. You need to be at about 150,000 or so, call it that, to be healthy, and so I think the weakness in the job market means that the Fed's going to cut. Now the question is, how, how much do they cut, and how fast? I think being quote, unquote data dependent, I when I see the data, makes sense to me that they're going to be faster at the cut. Problem is that causes a weaker dollar, weaker dollar, six months later, causes higher inflation. So it's a tough spot for them to be in for sure, Paul, I'll know what you think. Well,

Paul Barausky:

I would love, obviously, coming from my prism looking at commercial real estate and industrial specifically, I'd love 50 bips right out of the gates, unless we've all gone mad. I think 25 basis points is table stakes on September 18. We really have one more number. They'll talk about right jobless claims and payrolls tomorrow, as you indicated. Then it's a blackout period, but we're seeing those future betting odds almost at 5050, now for 50 basis points in September. So so we kind of feel from our corner of the world, or I do in the input I get. I don't want to put words in anyone's mouth that I'd love 100 basis points by the end of the year, and I'd love 250 total by the end of next year. Obviously I have selfishness and a bias, but I feel like all the smart folks I talk to from coast to coast say that's kind of where we are based on the acceleration that happened coming out of covid, that inflation, all the pressures that mounted, and now we've somehow gotten into some kind of soft landing, even if I told you, I believe we've been in a mild recession now for months.

Clint Sorenson:

Yeah, it's a soft landing from the market's perspective, like just the indices, but if you look at it, manufacturing, we just put out even worse, new orders yesterday in manufacturing. Manufacturing has been a recession. Trucking has been in a recession. Commercial Real Estate's been in a recession. Regional banking has been a recession. It's just we're very much a consumer economy. When you look at the aggregate, and you look we are very resilient economy, very diverse economy, and so. When you look at the aggregate, it's easy to kind of get, you know, grab onto these narratives and these notions that, hey, we're in a soft landing. No landing. Recession, not recession. At the end of the day, none of that stuff really matters. It's really about the direction of growth falling. Growth's been slowing, and the Fed's been too tight, and I feel like them waiting on jobs. The most lagged data set we get is what's put us in this very difficult position? And I actually think, to your point, cutting 50 basis points, I think that's too light. I think they should, they need to cut, if you look at historically, and a hat tip to David Rosenberg for putting out this. But essentially, the Fed's always cut in a cutting cycle to below the five year average of the Fed funds rate. So that would be like 275 by his math, and above that, we're too tight. So think about it from that perspective, above a Fed funds rate of just call it 3% let's give them a leeway. But 3% is too tight. We're at 550 Yeah, side of the market, so we've got to cut at least 200 basis points. I'm with you. I think it's got to be faster. Well, you

Paul Barausky:

would have been in the Jeremy Siegel camp three weeks ago when he came out banging the gong for emergency rate cut 75 basis points. I called it clickbait. He just wanted people to go to, I think Wisdom Tree. He shows great firm. But you know, what did I say to you before you got a better chance to see an Elvis come through the room riding a live dinosaur. So that's not going to happen. That would spook the market, but I will tell you something interesting that happened today. I don't know why, and you're the market technician, not me, because people tend to think in even numbers, 4% three and a half, 3% 380 has always been this kind of mythical support level for the 10 year treasury. And nobody quite ever explains why, but all I know is we're at 373 point 755, right kind of at the end of trading today, the fourth. I don't know where we exactly close it, but if we close below that, 380 a couple times, Clint will go test 350 on the 10 year, and then we'll eventually get down to testing three. And so that all works, with the Fed coming down as well. We finally get to that uninverted yield curve, which happened for what a half hour about the world starts to look like something of normalcy that we're used to again, and it's not a manufactured world, maybe, as it was with zerp for so long. So I would argue that maybe, yeah, the Fed could be late, but we could also get into kind of a normalized environment.

Clint Sorenson:

I hope so, and I hope they get there quickly, because the tightness in the money supply has really been an issue. And those issues, it's like a cancer. The longer you let it metastasize, the worse the body becomes. And that's what's essentially happened the Fed, you know, the tightening cycle, the most aggressive in history, yeah, from a rate of change perspective. So just to keep and that's the way I think of everything as a rate of change and flow and trend. The trend in tightness has never been witnessed before in terms of the steepness and the magnitude ever in our nation's history, and so we don't know how long that creates issues in the system. I can tell you that liquidity measures last year were saving grace to the banking system in terms of the loan guarantees, not having to mark to market those assets. It was a huge boom for markets in general and liquidity. You know, corporate bond spreads, especially on high yield, moving back to low points. It was like risk was great again. However, we can't forget the real economy trends, and those real economy trends are downs. The Fed needs to cut these. Cut aggressively, because I'm with you a recovery trade, exactly what I want to see the pitch. Investments are all correlated to recovery. They're all correlated to a new regime of higher than average inflation, probably over the long term. So maybe the 3% is the base rate, not not one. But ultimately, no matter how that plays out, all the fat pitch from a valuation perspective, are in are allocated or correlated with that recovery trade. Paul, so that's we need to see it, interest rates. The good thing is, we're seeing rotations. I noticed one of your points, some of the rotations are under the hood. This market cap concentration starting to move away, right, starting to move away from the mag seven. They're all starting to trail and lag. And guess what? Utilities, that's needed for AI, right?

Paul Barausky:

But utilities, we cannot talk about the demand for power. That's yeah. So utilities

Clint Sorenson:

are in outperforming the S P, gold's outperforming the S P, and this over the last three months, low volatility is outperforming. And my favorite poll is real estate breaking out on a relative basis to the s, p hitting five month highs, it's been one of the top performing sectors. Now, if you look out over the last year, real estate has made it into the top four sectors. It was the worst. So it just shows you how much the real estate sector's rallying. And that's what I want to see. I see rates coming down, it's like, okay, there's tons of opportunity. It's a fat pitch trade. Now I'm seeing it break out when valuations suggest that REITs, if you just look at REITs, they're priced for eight plus percent per year returns paying on the segment for the next 10 to 12 years, according to research and affiliates. So I'm like, That's exactly where I want to shop. And when I see it breaking out in that rotation. It gets me really excited. However, the Fed can't get caught being too slow on this path, because here's the situation that can manifest. They come out 50 basis point rate cuts. They're saying we're going to be data dependent. They don't really know where neutral is. It's, you know, pals not really committed to getting below the neutral rate. And so what ends up happening is you get inflation accelerations and maybe last a quarter on the back of the weak dollar. That inflation acceleration spooks them out of an aggressive rate cut cycle, and it pretty, pretty much puts a cap, or at least a temporary restraint, on any recovery. So you get into this rolling, contractionary phase. Fed's got to be committed. Who cares if the market gets spooked? We're all big boys and girls, and need to manage risk. They need to jump out. They need to cut and they need to support the economy, if not start to question their motives. Well,

Paul Barausky:

what do we take off the balance sheet when these 2 trillion?

Clint Sorenson:

Yeah, but we expanded it from 880,000,000,008 to 9 trillion. Well, I'm gonna back

Paul Barausky:

up and touch on something you said, and that is looking at recovery. I'm going to focus in on my part of the world. I would urge anybody who looks at Mercer, terrific consulting firm, right look at the last three big downturns for real estate, early 1990s the global financial crisis and the tech crash. They put a piece out that showed the trough, and then two quarters either side. So that's five quarters to make that entry point. And real estate is just a proxy for all the different sectors. You're talking about, your out performance over the next five years, and just a passive basket, say, using a Nayef index, was like anywhere from 130 to 400 basis points. And I'll just call maybe baseline 10% so that's a significant out performance, and that's just, you know, I love running any race I can run with a head start. Not everybody is Noah Lyles in the Olympics, 40 meters into 100 and last place, and she closed with a kick. So I think it's black and white. We always talk about it in investing, particularly all the time that you and I have spent over decades talking to individual investors and advisors about, you know, looking for opportunities. You may not have a bottom but boy, the Fed may have teed us up for some great opportunities. And who's to say what those are? So, what about this election cycle? As it draws nearer? Do you think that's creating any opportunities or just a bunch of mush? I

Clint Sorenson:

mean, I tend to see it more as noise than any signal. You know, if you think about it and you reflect on past elections, look, here's the one thing I can not guarantee, but I would place my bets on deficits are going to continue to expand. Yeah, right now, is the percentage of GDP is 8% we've never seen that outside of either a major world war or a pandemic. That's it like going back as far as we have data, and we're running that at a rising unemployment rate, but an unemployment rate that's historically low, yeah,

Paul Barausky:

much lower than the pundits thought would occur as the Feds started to take action.

Clint Sorenson:

Yes, I mean, you're close to full employment, there's some weakness, but you're close to full employment and you run an 8% deficit relative to GDP. That's going to happen no matter who's in office. And it's just, how does the money get spent? Well, you know, in a democratic run Office, that money is going to get spent through governments. That's how it gets routed to the system. When you look at it, for most Republicans, right leaning policymakers, when they're in control, from a policy perspective, what tends to happen is that gets, you know, moved through the private sector. And no matter what side you're on, there's plenty of corruption in both of those we call you, call it lobbying or bribery. Yeah, it's just, it's just worked. But no, that's the way the system works. So when I look at that, and I look at these long term deficits, it gets back to some of the big key themes we talk about the time, Paul and like, if you look at all most of the guests we interviewed, I think this is unanimous, real assets over financial assets are due their time from a long term perspective. And so that seems like a good bet, going into where we are from an economic regime, fact that real assets have really been hit and are achieved valuations. But you start to think through this long term devaluation of developed nations, currencies that policymakers are are are going to continue down the track because they can't get elected if they cut off the spigot. I think it's just a good nature to kind of bet on that or good fat pitch. And so yeah, I think real assets are the way to play it. The more and more I think about it, everything kind of correlates to that big overarching theme. So here's the right spot. Paul, well, I didn't. The right segment.

Paul Barausky:

My third thing to talk about Nvidia. I didn't bring it up because I thought there was some major government action. I brought it up because, again, one of my wife's childhood friends was on CNBC this morning speaking about it, former SEC litigator. And also, frankly, we're starting to hear about competition, right, about other things hitting that trade which it seems like the world was in. So to differentiate yourself, you had to be elsewhere. And maybe folks are starting to look elsewhere. The only thing that I've been really looking at economically with the impending election is Trump's idea tariffs and kamala's idea of 28% you know, corporate taxes, or

Clint Sorenson:

unrealized tax, like unrealized gains, which makes people borrow to pay. It's exponentially regressive to the economy. So I don't see any of that passing. There's

Paul Barausky:

no way. I mean, how do you even implement that with our layers of investing? And it's just

Clint Sorenson:

too expensive to implement. The cost don't outweigh the benefits. So whoever is running her economic policy needs to really do a little digging into just basic economics. But the Trump tariffs, tariffs are an issue as well. So you know, they're both problematic and they're both economic suppressants, at least temporarily. Now hopefully, and again, the tax thing is a big, a big question too. When you when you start to think about the deficits we're running, it's hard to raise taxes if fiscally you're not demonstrating responsibility. That's a very challenging thing to do, because it's kind of like do as we say, not as we do so. And I think tariffs are just another word for tax too. So you got to think about it on both sides. Both of these policies are, in my opinion, poor choices when you're running fiscal deficits that continue to increase and they're not going to slow down. So that's my thought process,

Paul Barausky:

all right. Well, there's three quick points to talk today. We

Clint Sorenson:

didn't get yours. You gotta you gotta share. So you can't leave me on the

Paul Barausky:

pitch. Oh, come on. I talked about valuations in real estate and gave you some info from Mercer. Uh, remember, I never come up with an original thought on my own. So listen, we appreciate everybody tuning into the fat pitch. As we said, we're back from a self imposed hiatus, and we look forward to coming to you at least once a week, probably twice a week, sometimes on our own and sometimes with a guest. But Clint, as always, thanks for joining me today, and I look forward to our next time. Take care. See ya.