The Fat Pitch

Market Moves and Monetary Mysteries: Navigating the Current Economic Landscape

• Clint Sorenson and Paul Barausky • Episode 20

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In this episode of the Fat Pitch Podcast, hosts Paul Barausky and Clint Sorenson dive into the latest developments in U.S. monetary policy and global economic trends. 

They explore the implications of recent Federal Reserve decisions, the impact of China's stimulus measures, and the shifting dynamics in market structures. With insights on inflation, credit growth, and investment strategies, this discussion offers listeners a comprehensive look at how these factors shape today's financial landscape. 

Join Paul and Clint as they unravel the complexities of the market and highlight potential opportunities for savvy investors.


RECORDED SEPTEMBER 26, 2024

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Paul Barausky:

Well, hello everyone, and welcome to the fat pitch podcast, the most irregularly scheduled podcast you may ever see, although Clint, my co host here tells me we are going to get back on schedule with two a week. Clint, how are you?

Clint Sorenson:

I'm doing great. Paul, how are you? Man,

Paul Barausky:

I'm good. Thank you for those of you tuning in for the first time, I'm Paul Borowski, Chief distribution officer for Sealy investment securities, and my co host here, always in a different hat, is Clint as Sorensen, founder and CEO of wealth shield and many other entities, a terrific market technician, CFA, leader of, I don't know how many analysts, and if you ever get a chance to see him speak, usually, always on point. Clint, I want to pay you a huge compliment. We're doing away with one of the segments that we run. And I had somebody calling me in tears because they said once a month, you distill market information as well as anybody. So thanks for being on today. What do you want to talk about? We try to do the fat pitch on three things. What's first?

Clint Sorenson:

Yeah, I think the first is the Fed, right? Don't fight the Fed. We got to talk about the Fed. Yeah,

Paul Barausky:

we got it. We wanted it. We didn't get Jeremy Siegel 75 but we got 50. And you told me you knew it was coming when Nikki leaks, you know, knew it a week ahead of time?

Clint Sorenson:

Yeah, you and I've been talking about this for a while, right? Everyone was in the 25 basis point camp. There isn't some people talking about no cuts with all the landing narratives. And you and I were just saying, hey, it's gonna be 50. Because, you know, a lot of people are just looking at the headline economic numbers, not understanding that those are usually lagging and subject to heavy revision we're about to get, we got a heavily revised negative number in jobs, right? 818,000 jobs came off the payrolls that were previously announced as growth, and then we're about to get a huge GDP revision negative this week. So when you look at that, that's what everyone the market commentators, are looking at, oh, economy stable. You got to look underneath the hood. And the Fed's doing a good job looking at that. They saw deterioration in the labor market. They shifted their focus through inflation, in which the trend was down, definitely disinflationary. And they looked instead at the economic activity, and there's no notable slowing in the economy and has been slowing since April of 2022 right? You can't stop private credit or private sector credit grows without having economic decline. So if that did the right thing, if I was Jerome Powell Paul, I would have stepped out and said, Hey, we're cutting 180 basis points. We're going to get to neutral right now.

Paul Barausky:

You want to put the market into shocks, giant defibrillator. But I find it interesting November, which is look exciting. November's futures betting of a 61% 50 basis point rate cut is like ranking college football teams preseason, right? Too early to tell. I know, as a Tar Heel basketball fan, you were already you're still angry from last season's drop off, and you'd like to see where they're ranked almost immediately. But we're still in football season, and your stud quarterbacks up in New England struggling. So back to too early to tell. I don't know, 50 feels right this early in advance, you had Austin Goolsby on CNBC, as he's always is. He is more dovish than most. You know, I think the people in the Fed are concerned what you said about the economy and about unemployment and not just about inflation, exactly.

Clint Sorenson:

I think the focus has shifted, and that's the important piece. Now the question is, will this Ignite inflation? That's the next question, Paul, is, do we have the necessary economic precursors, is this rate cut or the path to to future accommodation? Because we got away, we got a ways to go, right? This is more animal spirits, is what you're seeing now. But a 50 basis point rate cut is pretty large. Historically, if you look at the first cut being 50 basis point cuts, it's usually a pretty tough economic environment. You have to go back to 2007 eight. Got to look at 2000 to 2001 there's 2001 so those are the time periods when you had interest rate cuts that are 50 basis points. Typically this first is 25 but we got way too tight. So this time is always different. And I know those are dangerous words, but I'll tell you, I think the key is looking forward on growth, and what we're seeing is the rate of change on leading indicators actually bottoming. Now, leading indicators haven't bottomed, but that rate of change has. And so what we're going to most likely see is you get a steepening in the yield curve. You've got really easy financial conditions. If you look at the Goldman Sachs financial conditions index, and you start to see the Fed really clarify the path, which I think is going to be more aggressive than people are thinking because they were more aggressive on the tightening cycle, and inflation is continuing to head down. That's going to lead to, just because of where we are in 25 you're going to get an acceleration in growth in the first half. My question is, and I think this is the big question for everybody, is, what does that do to inflation? Do we have growth and inflation accelerate together? If that is the case, the Fed. Historically tightens in that period. So I would expect them to slow or stop the rate declines, and so they've got to cut really aggressively on the front end in order to go into 2025, with a lot easier monetary policy, kind

Paul Barausky:

of ease off a little bit. So you could go 50, 5050, and then slow down. Well, we did see on the announcement the 20, end of 2025, target on Fed funds. I think I saw 340 so that narrative would fit what you're talking about. We got a lot to see. But when it comes to inflation, look, a lot of economists just throw out the US. Home prices hit another all time high in July, rising 5% over the last year. Any thoughts on that? Since it's such a big component?

Clint Sorenson:

I mean, the you know, that's, that's one thing, right? But owner occupied rents is more important than, like, Case Shiller, home price index, and those, those continue to go down. Now, base effects, so kind of the base level, they get a little more troublesome. In the first half, I expect an uptick in inflation. Does it go to three, four? I don't know. Right from two, eight slash 278, on the low end, up to three, four, possibly, we could have a meaningful uptick, because basic picks get more challenging as we enter about back after this year or last quarter of this year, really, December, which is reported in November into the early part of next year. And so just because of that kind of two year comparable base effects that how CPI is calculated, you could have some pressure there because of owner occupied rents, obviously, kind of trailing off slowly, but you just, you just have less base effect benefit that we've had this last course, this big drop off we had an inflation was because base effects were giving us a great comparison over the last two years. Now that's getting a little more difficult in the first half of the year. I don't expect it to be meaningfully difficult, but I do expect it to throw a wrench into the Fed's plans. So they have to get to below the two year rate. Two year rates at what three eight today, they have to get below the two year rate to become accommodative, so that three, four that you mentioned, that's perfect. Get to supportive of private sector credit growth, and you will have the economic cycle is very easy in the US, it's completely dependent upon the flow of credit. So as long as you're allowing the private sector through the banking system to create credit, you can get economic growth. And we have that has stopped. That stopped in 2022 as you know, Paul, looking at the real estate market, it essentially stopped. And now when you look at it going forward, it still stopped, still like 20 net, 22% of banks surveyed are tightening credit standards that that's crazy at this point, right? The Fed's cutting rates, so we've got to get to accommodative. We've got to allow credit to start flowing, we are going to get economic growth. We're going to get a slight uptick in inflation, most likely in the first half of the year, and the Fed needs to handle that in a data dependent fashion. But they don't need to be too sensitive to interest rate because or to inflation. If they are too sensitive to inflation, they run the risk of creating a landing scenario that they don't want, which means they cut off growth too soon, you end up back in a decline. And that is, that's a very dangerous place to be. You've got to allow the economy to recover. And I know a lot of people hear that, and they're saying, Oh, but we've been in a robust economic environment. No, we've been in a robust market environment. If you want to look at, if you want to look at recessions, look at there hadn't been a recession to consumer but if you look at recessions, where the recessions have been, they've been in commercial real estate, they've been in trucking and transportation, they've been in manufacturing, all these areas have been in really tough spots, and now you're getting labor market deterioration, which shows you that you're at the tail end of the contraction, and we need supportive policy here. So hats off to the Fed. It

Paul Barausky:

was just, it was just two years ago I was doing that presentation about trendemic and trends in the pandemic, and talking about the employee, not the employer, having all the power up and down the wage scale. And the worm has turned also as somebody who lives, eats and breeds commercial real estate. I, for 1am, applauding that the past two years are over, it has been like unscrewing rusty lug nuts with my eye sockets. It's amazing what's changed since you talked about our economy. Let's go to the other side of the globe, because, again, we're recording this on Thursday, September 26 and I woke up to see a whole lot of things I haven't deducted yet coming out of China, in terms of economic policy. What the heck's going on?

Clint Sorenson:

You know, they need to stimulate. And so they're, they're jumping in with big stimulus, and it's been needed. Their economy has really, really suffered due to the fact that they're essentially pegged to the dollar. We've been extremely tight from a monetary perspective or a monetary policy perspective. And remember, when you are pegged to our currency, you are literally giving us control over your monetary policy. And so that has been a substantial issue for China and their economy. And so it's been very deflationary, and you seen that in probably. Prices. You've seen that in economic activity, you've seen that in the stock market. That's another recession, if you want to point out to global recession, number two economy in the world, a lot of their stocks are down 80 90% from the peaks. So their market got completely crushed, and now you have stimulus. They directly made 500 billion available to banks to buy stocks. So think, think about that. That's direct stimulus into the economy, and the markets are celebrating it. That's an IV

Paul Barausky:

and well, you know, you talk about their economy, we've noted in the past, just personal discussions may be recorded just the sheer amount of commercial real estate in their economy, and then their leverage on it, which was greater than ours going into the global financial crisis meltdown, by a significant multiple. Yeah,

Clint Sorenson:

you've never seen debt build up like we saw in China as a percentage of GDP. It's been absolutely breathtaking and unbelievable, but they had to again, just due to the fact that they're pegged to the to the United States dollar. So it's it's been a wild ride, but I think they're poised for significant growth. They have some issues demographically, as we know population shrinking, but I think that the government has to step in, and they're doing it. And look, their mechanism of stimulus is a lot more efficient than our mechanism of stimulus, because they when they make a decision, they flow the money right into the system. That money goes exactly where the government says it should go, and it gets, it gets put into the economy. So I think this stimulus is going to be meaningful. And I don't expect this to be just the beginning or the end of it. I expect this just to be the beginning.

Paul Barausky:

I always tell people, when you have complete control, like China, we go to the doctor to get the prescription, you take some pills, wait for them to take effect. They put an IV right in the arm. And that, if you look at

Clint Sorenson:

a lot, that's exactly what's happening. And if you look at a lot of hedge fund managers, I've been following them, a lot of them moved out of us tech. And I think this is one of the greatest fat pitches that I see, personally. But they moved out of us tech into China tech, interesting. And I think, and you saw that position last quarter, right? So, Michael Berry, famous for The Big Short right? He was Christian Bell. Christian Bell played his, played him in The Big Short Movie. And he, I think his largest position is Baba. So big Chinese tech. And if you look across major hedge funds, a lot of them have allocated to not only that name, but several names within the Chinese tech space. And so I think a long Chinese tech short us tech play might not be a bad might not be a bad play, especially if we're going into an economic recovery. That might be the fat pitch it

Paul Barausky:

might be. Which brings me to the third thing I wanted to talk to you about today, which you and I have spent hours upon hours talking about, which is the US is printing press when it comes to printing Benjamins. And very quietly, I think unaware are most people that over the last year, the money supply grew by 2.2% and that's the biggest year over year increase since September of 2022 what gives why? How do you view that? Yeah.

Clint Sorenson:

Well, money supply collapsed during the Fed's Titan phase, right? So, and then they had to stay that off during the banking crisis, so that if you really look at money supply, just look at a year over year Percentage Change Chart. That percentage change really the bottom in the midst of the

Paul Barausky:

banking crisis. Is this just reversion to the mean? No, not necessarily,

Clint Sorenson:

right? I mean, stimulate globally. There is global into so if you look at global money supply, it is increasing. If you look at global money supply, and you look at, if you look at just overall liquidity trends, they are trending upward on a global scale. The US is actually lagging the globe in that regard. And I think this is just the trend we're in. At the end of the day, we're in an environment where a lot of people call it a currency debasement. Race to the bottom. I'm not necessarily in that camp, the de dollarization camp, but I am in the camp that governments are going to continue to stimulate and going to continue to support their their economies, and money supply growth is going to continue. It has to continue to accelerate, because we have such this, this huge debt load globally, and that huge debt load is deflationary, and so you're pushing against that deflationary debt load by creating monetary inflation through money supply growth. Now, if you follow money supply growth, and it is up ticking in the US. And globally, what you typically get in conjunction with that is, if you get money velocity, in particular, is you get inflation. So China stimulus is going to be meaningful, in my opinion, and global m2 because if you think about what happens with that stimulus, and it goes right into the real economy, it benefits commodities. And what do commodities do when price and think about the Fed easing at the same time. So dollar moving down, commodities moving up. What does that do to inflation? It moves inflation upward. So I think it sets I don't think it's going to be as grand as everybody says, Oh, we're going to have the second wave of inflation like the 70s. You know, all this, what I call fear porn for

Paul Barausky:

financial. Pornographers and yeah, I also there's so much clickbait right now that you got to write sensationalist stuff, right? Yeah. And

Clint Sorenson:

that's it. That's what that is, in my opinion. Sure, it could happen, but look, there's never been a case of historical hyperinflation in the currency that borrows money in its currency. So I don't think that's a big risk for the US. Can we have high inflation or another uptick, for sure, but hopefully that's accompanied by growth. But my supply growth like 2.2% on a year over year basis, isn't meaningful. Think about what it was in 2021, 2020, 2021, it's like 42% vertical.

Paul Barausky:

So since we're doing these in a lip or compact fashion, I don't want to impact this whole thing. I want to record it with you on Monday or Tuesday, when I'm back from Europe. But are you aware that earlier this week, I'm going to throw some numbers at you, there's someone I follow on, Finn twit, who pointed out that the S, p5 100 early in the week was now 300 points above the highest 2024, year end price target from all of the Wall Street strategists in 18% above the average target, and there's still three months to go. And so we know that around an election, the market usually doesn't take big move, right? But all the rules seem to be up. What is going on? I mean, it's

Clint Sorenson:

market structure. It's 100% market structure. Market structure has changed in such a meaningful way that people can be writing about this for a long time. Indexation, which are essentially price takers, are now the dominant force in the market. So they're market cap weighted indices. So it causes one problem, on one end, is where we under invest in areas that need investment to help us economically long term, and you're just investing in big tech because there's a big market cap names. But what's happened is indexation is this endless bid. And if you look at that, plus, if you look at foreign capital flows over to the US, guess we're all, I mean, even foreign central banks, guess what they buy? They buy the big, mega cap liquid names because they need liquidity and they want participation as investments, and it becomes a self fulfilling prophecy. So what happens is, you get the price takers, indexers right that are now the big, dominant force in the market. They become the price makers, and that's a problem, because there's no price discovery. They just buy the biggest market cap names. They don't care. So momentum is so powerful now, and that's essentially what the S P index is. It's a rules based momentum index where essentially you're just doubling down on the bigger names, so you're following flows. And I think that's what we see today. I think it's market structure related. It's very positive in the near term, but I think indexation long term from a contrarian perspective is the most dangerous thing you can do right now from an investing perspective, because they expect your returns are a lot lower if you buy a market cap weighted index than if you buy small caps or international or China, or if you buy real estate, right? All these relative because of indexation, the relative valuations between these different segments is as stark of a contrast as I've seen my career. I mean, just look at real estate. Look at the REIT index versus the s, p Paul. It got below, on a relative basis, the 2009 lows.

Paul Barausky:

Oh, well, you I showed you the Mercer piece from earlier in the year, which showed the last three big downturns. You know, tech, tech crash, early, 2000s global financial crisis. You don't even need to pick the bottom. Showed five quarters, two on either side of the trough. And it's remarkable. So I think you gave us some cool, fat pitches today. As always, this is fun. We should drag one of our friends on for our next episode. See if they can wax philosophical in let's get Jay Yeah, let's do that. So Clint, and I appreciate your time today to our audience who tunes into this. Hopefully we appreciate you listening to the fat pitch and for Clint Sorensen and Paul Borowski signing off today, make it a great one.

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