Closing Bell - Closing Bell Overtime: Behind the surge in natural gas, Hartford CEO on insurance inflation, why yields could be heading higher 8/11/23

Episode Date: August 11, 2023

Stocks finished a mixed week with a mixed session, with the Dow eking out gains for the day and the week. Bob Elliott from Unlimited lays out his top sector picks. Energy trader Bill Perkins discusses the big week for energy stocks and natural gas. The CEO of insurance giant The Hartford talks about the impact of catastrophic events like the Hawaii fires on the insurance industry. Warren Pies from 3Fourteen research lays out the bear case for bonds. Plus the latest on AMC’s stock conversion plan, and what to watch from next week’s retail earnings.

The picture for stocks on this summer Friday, but the S&P and the Nasdaq both putting in their second week of losses. That is the scorecard on Wall Street. The action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan. John Ford is off. Coming up on today's show, we will talk to energy trader Bill Perkins from Skyler Capital Management about the spike in natural gas prices, which are up about 7 percent on the week. That's here in the U.S. Plus, the CEO of insurance giant The Hartford joins us to talk insurance inflation and the impact from those devastating wildfires in Hawaii. Stocks closing out an up-and-down week with a mixed session, as I just mentioned, led by the blue chips.

The Dow managing to hold on to gains for the week and the day as well, while the Nasdaq composite fell 2% on the week. Joining us now is Unlimited CEO Bob Elliott. Bob, great to have you here on set. Nice to be here. I want to get your thoughts on what we've seen in the markets. We've been having a lot of discussions in recent days about the fact that this is a market that was due for a pullback. How do you see it? Well, we started to see a little bit of the markets starting to create that tightening. Rather, you know, the Fed has kind of backed off a little bit and said, basically, they're done for now. And then we've gotten enough move on the long end to start to create some financial market tightening. And so what you're starting to get is those high flyers

are feeling the effects of that market based tightening and are starting to come down. You know, it's why what we're seeing is we're seeing the tech stocks underperforming and we're actually seeing energy stocks outperforming, you know, stocks that had lagged for much of the year. Is that a trade that's sustainable here? Well, I think so, because what we're seeing is the strength of the economy is continuing to flow through. You're seeing those commodity prices continue to rise. Right. A great example is, you know, this week, commodity prices, oil prices up 7%, as you noted. And that's really supporting those stocks. At the same time, you're getting tech stocks, you know, we're talking about PEs at 40, right, for the tech sector, for the XLK ETF.

How does that look in an environment where we're starting to actually get that tightening of monetary conditions, that long end rising? It's going to be tough to maintain that high flying in that sort of environment. I mean, you're starting to see look look no further than the PPI reading this morning. That was a little bit hotter than expected. You're starting to see whether it's oil prices, whether it's some aspects of services inflation. It's starting to look like it could potentially be poised for a reacceleration here. What does that mean, not only for the Fed, but also for the markets when you've seen yields creep back up, you've seen the dollar strengthen, and you have seen some of these commodities move higher, too?

Well, I think a lot of what we're seeing both on the short rate market as well as in the equity market is basically like an all-in bet on soft landing and immaculate disinflation. And all of a sudden, people are starting to say, maybe that isn't actually going to play out as we expected. And that starts to create concern. You're starting to see the two-year move to some extent. You're seeing the long-end move. And you're seeing those commodity prices reaccelerate. And that's the last thing the Fed needs here. They've basically committed to be on hold through the end of the year. And if they start to see those commodity prices move, that's really going to start to question the fact that they should continue to be on hold. So at a time where we're starting to see more

economists pare back recession calls and some of the biggest bears on Wall Street actually start to soften their stances here, this notion of a soft landing, could it be at risk? Well, I think that this calls into question the general idea of soft landing. The problem with soft landing is it itself is self-defeating. Because if you price in the soft landing, you get the lower interest rates, you get the equity strength, and that means that the economy continues to be strong, which means that those inflationary pressures come on. And that then creates the problem for the Fed to need to tighten. And so we're just in that transitionary period where the disinflationary pressures have basically maxed out and we're starting to see the

reemergence. And that's the basic problem with the soft landing narrative in general. It can't exist because inevitably it will create the acceleration that will end the soft landing. Okay. So it sounds like you like energy, but are cautious to say the least on tech here at these levels. How else would you be positioning in this market? Well, I think it comes down to, you know, it's been a great, a great year so far for the highest beta stocks that are out there for the growth stocks. And you're starting to get pricing that is pretty extreme relative to history there, relative to when you look at the PEs in the energy space are in the low 10s, right, versus tech stocks in the 40s.

You start to see those areas where you have really extended valuation problems and where, I don't know, Nvidia is at a 40 times sales. Like, is that likely to realize, is that likely to happen? And I think as you start to get that market base tightening, people will start to question whether that can really be realized over the long term. And it doesn't take much of a pullback to start to create the downward pressure on those stocks. Yeah. Nvidia, to your point, is going to be an earnings report that people watch very, very closely, not only for the company itself and for this whole secular AI growth story, but for the market more broadly when we get those results later this month. I guess it raises the question, we are getting

into dog days of summer here. We know seasonally, especially as you start to look to September, this tends to be a weak period for the market. What's the next big catalyst? Well, I think it really comes down to what's going on with those energy prices. If we continue, you know, this week has been very interesting because you see energy prices continue to rise while you see bonds sell off, while you see stocks a little soft. If we continue to see that market action, that's going to be very tough for the stock market entering the fall. And so we really got to look at how is energy playing out relative to the rest of the financials that are out there? Yeah. And of course, I have to ask a question because we've gone through this entire year in this hour with you through the banking turmoil, through all the ups and

downs around the financial sector more broadly. What do you think of the sector? What do you think of the banks here? The banks have rebounded pretty well. I think a lot of the challenge that happened in the last couple of days related to the Moody's downgrades, it's like Moody's was the last one to get the message here. It doesn't really give you much additional information. Those banks continue to look pretty strong. They continue to get those deposit inflows. And while they might not be quite as profitable as they were before, they're still pricing in an outcome that's consistent with as bad as it was right after SVB. And that continues to be implausible. So when you're looking for some value in the market that doesn't have a whole lot of value, those stocks continue to look pretty good.

All right. I want you to hang tight because we are starting to get some of these 13F filings for the quarter. Bridgewater's 13F filing is out. Kate Rooney has the details. Hi, Kate. Hey there, Morgan. So Bridgewater Associates decreasing some of its exposure to gold and also adding a new stake in AT&T. Let's start with gold. It's dissolving its stake in the Spider Gold ETF that was valued around $162.5 million, around 800,000 shares there. This, of course, is the hedge fund founded by Ray Dalio, also adding a stake in AT&T. That was a 1.9 million share stake valued around 31.6 million. Guys, this is as of June 30th. Things may have fluctuated a bit since then, but again, some new positions there for Bridgewater. Back to you.

All right. Kate Rooney was on the lookout for more filings here in the after hours. Bob, that's your alma mater. It is. Whether you want to respond to that specifically or even just as it kind of goes back to the commodities conversation we were just having. Yeah, I mean, I think it's interesting when we look at all hedge funds using our tech at Unlimited, what we're seeing actually is that many hedge funds are adding positions in commodities in direct, whether it's gold or oil or copper, seeing that pressure in those markets. Hedge funds have doubled their positions in commodities over the course of the last six or eight weeks. That's very interesting. It's not a position that many people are looking at right now. And it's something that, you know, I think has been supportive to those markets, but I think also indicative that they may be on the front edge of seeing continued upward pressure on those prices.

All right. Bob Elliott, it's always great to get your thoughts. Thanks for joining me here on set. Thanks for having me. CEO and CIO of Unlimited. All right. Let's bring in senior markets commentator Michael Santoli. Mike, what you watching? Well, we'll take a look at the broad market, Morgan, and what we achieved or didn't quite achieve this week in the S&P 500. There was a quasi test of the index's 50 day average this morning. Didn't quite get all the way down there. I've been very interested in this pattern over the last four weeks or so, which has taken it at today's low right back to where the high of the day was the day before last month's CPI reading.

And I keep pointing it out because that seemed to me to be a little bit of a mission accomplished moment. A lot of folks migrated to the soft landing story there. And we sort of went right back to that level, closed that gap on the chart. Maybe that's going to be significant. It seemed like this morning it was an area that the traders and the mechanized players in the market were geared towards. So we'll see if that matters. Really, it's a very minimal decline on the index week to date. Take a look here. It's something I think tells you something about the tone of the market. SIBO, the options exchange, new highs. You see this one year, 27 percent. Compared to BlackRock, which is a massive asset manager, $9 trillion

under management, it's buy and hold for the most part, bonds, stocks, ETFs, long term funds. And it shows you that right now the transactional investor trader out there is very busy and flows into longer term funds have been relatively modest, at least to this point. People have not been chasing this market. All right. Is this a reflection of kind of some of the uncertainty and some of the push-pull you've seen between bulls and bears in this market this year and just the divergence of calls and the fact that it is playing out in options? I think you've seen a few things, Morgan. One was the momentum to the upside that the rally took on, and you got retail much more excited about stocks, particularly tech. You also have an uptick in volatility recently. That creates a lot more for traders to do. Also, this phenomenon of single data maturity options,

it just keeps feeding on itself. So basically, a lot of people like to play the lotto. The CBOE is where you do it. Yeah. In case you weren't the winner of that mega millions, what, one and a half billion dollar ticket earlier this week. Mike, we'll see you later this hour. Let's turn now to breaking news on Sam Bankman Freed, who was sent to jail this afternoon by a New York judge. Kate Rudy has the latest. Kate. Hey there, Morgan. So Sam Bankman Freed's bail has been revoked. The founder of FTX is being remanded to jail in the New York area until his trial in October. The judge saying that he really pushed the envelope of his bail conditions. He said, my conclusion is that there is probable cause to believe that the defendant tried to tamper with witnesses at least twice. DOJ prosecutors had accused Bankman-Fried of intimidating witnesses

through hundreds of conversations that he had with the media. The latest example, Bankman-Fried had leaked a series of documents to the New York Times about a key witness, Caroline Ellison. She's the former CEO of the hedge fund Alameda, which was also founded by Bankman-Fried. She's already pleaded guilty to multiple counts of fraud and is Bankman-Fried's former girlfriend. Bankman-Fried's legal team had argued that he was exercising his First Amendment rights by talking to the media and that the discovery process here could be hindered if he doesn't have access to the Internet. The judge had already issued a warning back in July. Begman-Fried had his Internet access restricted,

was not able to use a smartphone either. That's being discussed right now in terms of where he's going to end up and that Internet issue of him being able to access some of those documents. They're still figuring that out. I'm told his parents have just exited the courtroom as well. They are not giving comments to the media, but it was an emotional hearing. Our producer, Don Geal, who was inside the room, said that his mother was attempting to say goodbye. It was extremely emotional. So some color from inside the room there. But the FTX

founder had been on house arrest at his parents' house. It was part of a $250 million bail package that had been set. And the trial, guys, set to kick off October 2nd in New York, but he will be in a detention center until then. Back to you. All right. Kate Rooney, thank you. Energy was the top sector this week and natural gas prices surged. We'll break down the move and how much higher prices could climb when we're joined by energy trader Bill Perkins from Schuyler Capital Management. Overtime back in two. Welcome back to Overtime. Natural gas seeing a big move this week, up more than 7% on the back of labor disputes at two major liquefied

natural gas facilities in Australia. Also driving prices higher, the Energy Information Administration projecting record highs for production and demand this year. Joining us now is Bill Perkins, CEO of Schuyler Capital Management. Bill, it's great to have you back on the show and to check in with you. Yeah, it's great to be back. What we just laid out, are those the reasons we saw these big moves in nat gas, which, by the way, were even bigger in Europe this week? Yeah, I think Europe was all about the strike. That kind of spooked the market. You know, the market was positioned for them running out of space to inject gas.

And then the rumors of a strike in Australia had everybody pump the brakes and they had a huge rally. I think natural gas, you know, had a little bit of a sympathy rally. But let's face it, it's hot. I'm here in Austin trying to move my daughter into college. And one day heat doesn't make a difference. But sustained heat drives a lot of demand for gas power plants. And we've been withdrawing in the South Central, some taking gas out of storage. And so that we've changed prices based on that demand. So then is it safe to say that the bottom is in?

Because I remember you came on earlier in the year and you were still very, very bearish on nat gas and where prices were headed. Are we headed higher now? I'm not yet ready to say we're going higher. I'm mildly bearish. I mean, the heat won't last forever. S&D does look loose. That supply and demand balances look loose on a weather-adjusted basis. And pretty soon we're going to September and the fall, and we think we're going to have healthy storage inventories. You know, it's not something to write home about. I wouldn't get too excited about being bearish, but I'm mildly bearish. I think the rally is overdone. OK. I mean, we've seen we've seen oil and I realize the oil market is very different

than the natural gas market in many ways. They tend to trade for different reasons, but we've seen oil prices move back towards highs of the year. I guess walk me through more broadly some of the energy dynamics and how real the possibility of a reacceleration inflation when it does come to energy prices is concerned. Well, to the extent that oil prices drive inflation, and they do, I'm pretty bullish oil. We have record low inventories. Recession or not, nominal crude oil demand goes up. And we haven't had this great investment in infrastructure for production. And so supplies are tight. The SPR is at record lows. I mean, you've heard it from more people than me that it looks pretty bullish. That being said,

when you drill an oil well, you get some associated gas. And as people pick up drilling in the Permian, that gas is going to eventually via pipeline find its way into the Gulf Coast and actually be bearish natural gas. You know, natural gas for many producers is a byproduct. Yeah. They just want to get rid of it. Yeah. So so I'm curious whether you're going to disclose this or not, but how your performance has been at the fund this year? Because last year you had an incredible year. You had a triple-digit return type of year last year. And it would seem like, based on our conversations since the start of the year, that your calls have been bearing out. Yeah, they've been okay. I would say that we're north of 120%.

I mean, that is kind of an estimate. I don't want to get in trouble. There's so many damn rules and regulations. That you can get in trouble for saying anything. but we're having a pretty good year. Okay. One final question for you, and that is you have SkyFi. It's a startup. You're aggregating and creating accessibility to satellite data in a bigger, broader way. You're basically democratizing satellite data. Curious how that's going, especially when I know that that satellite data has been so important to you from an investment thesis standpoint. Yeah, I think it's going very well. We've got a product out there. It's working. We're

seeing enterprise customers see the value of it at Skyfi.com so that people can get access to the data. One of the things that we're moving towards is instead of just giving the data, because a lot of people don't know what to do with the data, they're not necessarily GIS shops or natural gas trading shops or oil shops or miners, is give them the insights, give them the answers, the applications on top of it. And so that's coming out soon. And we're very, very bullish and happy to provide that to people. All right, Bill Perkins, great to have you on. Thanks for joining me. Thank you for having me on. Have a great weekend. All right, Bill Perkins, great to have you on. Thanks for joining me. Thank you for having me on. Have a great weekend. You too. After the break, we're going to talk to the CEO of insurance giant, the Hartford, about insurance inflation and the impact of the devastating wildfires in Hawaii. Stay with us. Welcome back.

The deadly wildfires in Hawaii are projected to have a major economic impact on the state and the popular tourist destination of Maui. Contessa Brewer has a closer look at the toll. Contessa. Well, Morgan, we just got new estimates from CoreLogic. In three of the four wildfire zones on Maui, there are more than 3,000 homes with a reconstruction value of $1.3 billion. Now, not all of those homes will have been destroyed or even damaged, but that figure also doesn't include commercial structures like restaurants and hotels, offices and churches.

AccuWeather estimates that the total damage and the economic impact together will come to as much as $10 billion. In the meantime, insurers are hustling to figure out how to process claims in spite of power being out, communications being down on that part of the island, roads being closed. State Farm has more than a third of the homeowners' policies in Hawaii. We have two offices that were in Lahaina that are not in operation right now. So we're trying to assist all those Lahaina town clients and people all over the island experience losses, either due to fire or high winds. We had winds gusting over 80 miles an hour. And so, you know, that causes significant amount of damage as well to homes, roofs, trees down everywhere. And that was something that really has been missed when we're talking about the wildfires because it's the devastation in Lahaina is so

complete. But we should be learning more about what kind of damage they got from those 60 mile an hour plus gusts from Hurricane Dora. We've learned that Lahaina residents are just now starting to be allowed back in Morgan. So this is a really fast-changing situation here, and the response to it necessarily has to depend first on the safety of those responding. Yeah. Contessa Brewer, thank you. Sure. Of course, our hearts and our prayers go out to the folks in Hawaii right now. Well, for more on the impact on insurers, let's bring in Christopher Swift.

He is the CEO of the Hartford. Chris, it's great to have you on. I do want to start right there, because as unfortunate as it is, everything that we're seeing play out in Hawaii right now, do you have exposure there? If so, what does the response look like? And if you don't have exposure there, how does it speak to, in general, the fact that we're seeing more extreme weather right now and insurers like yours are having to navigate it? Well, thank you for having me on. Morgan, it's good to see you again since the last time we visited. You know, for the Hartford, we're a diverse business. You know, we have

both commercial, personal lines, and benefits. Our personal lines business is, you know, the smallest of the three businesses, and we really don't have significant exposure in Hawaii. And as you said, our just hearts and prayers go out to those people that are experiencing just the devastating loss of property, but not only that, human life. So I think the trend that you asked about is clear and prevalent. There are more frequent and severe storms, particularly convective storms. Wildfire has its own dynamics in certain parts of the country, including California. But, you know, we are experiencing, you know, more severe activity. In fact, the first six months of this year has been one of the or the second most severe time in any of our history.

And we approach it from an underwriting side, a risk management side, and ultimately trying to help clients mitigate that risk and remain sustainable over a longer period of time. Yeah. And you have a very diversified book of business, to your point. But I am curious about the property book of the business. Are you growing it right now? And how does something like climate change factor in? Yeah, we have historically my vernacular would be would be underweight property, both commercial and homeowners. And it is an area for growth for us because I think it's an area of need. And we have the capital and the capacity and the know-how to take on more of that risk. And it's actually, given the magnitude of some of the losses that we've seen over the last five years,

prices have risen to the point where I think it's a good time to enter the market in a more robust way. And that's part of our strategy to continue to diversify our platform. We did get the CPI reading yesterday. It did show that certain types of insurance rates continue to climb higher, auto rates, for example, up 17.8 percent year on year. In terms of the rate trajectory and these price increases, are we seeing them, whether it's at the Hartford specifically or across the industry, are we seeing them as a means of keeping pace with inflation or for another purpose? No, you have it right. It's inflationary based, whether it be repair shops, whether it be used car prices, whether it be labor components of repairing cars,

it just, there's a significant imbalance coming out of the COVID period of time when a lot of people weren't driving. So the industry is responding to those pressures, inflationary pressures by ultimately raising rates. I can anticipate another question of how long is this going to continue? And a lot of it obviously depends on how the Fed performs in slowing down the economy and cooling things. But if they're successful over the next 12 months, I do think the rate environment is still going to be elevated in personal lines, particularly auto, for the next 12 to 18 months.

Okay. You have a very robust group benefits business. You also have a very robust commercial business. You insure something like one and a half million small businesses. So basically, this very wide-ranging view of the American American workplace and to a certain extent, the state of the labor market. What are you seeing? Well, you're kind to acknowledge our two biggest product lines are workers' compensation and disability insurance that both are employment centric, as I like to say. And I think we generally see health, health and small business formations, optimism and in group benefits. You know, there has been some layoffs that you could see in our data, but not massive amounts. In fact, you know, wage growth across those employment centric businesses, we would estimate somewhere in the 4.5% to 5.5%

range. So generally healthy. Obviously, the overall unemployment is low at 3.5%. So I think it's still a good time to be an American worker. Yeah. I know you're doing a lot around mental health conditions as well and have a treasure trove of data around that to make make life better for for workers, too. So I look forward to having you back on to talk about that a little bit more as well. Chris Swift, the CEO of the Hartford. Thank you, Morgan. More 13F filings are rolling in.

Let's get back to Kate Rooney. Hi, Kate. Hey, Morgan. So we just got a bow post. This is Seth Klarman's fund taking a new stake here in Amazon, also decreasing its stake in Alphabet. We'll start with Amazon here. 963,000 shares in the quarter. In terms of Alphabet, it looks like Baupost trimmed its position by roughly 30 percent, 29 percent there. Also decreased its stake in Corvo,

New Oriental and Tech, and increased its stake in Seagate as well. Entire Also decreased its stake in Corvo, New Oriental and Tech and increased its stake in Seagate as well. Entirely dissolved its stake here in Skyworks. But again, Baopo is taking a new stake in Amazon. Back to you. All right, Kate, thank you. After the break, the high cost of low unemployment. Mike Santoli looks at huge amount of fiscal support that has helped boost the labor market. This is going to be an interesting chart. Stay put. Welcome back. It's time now for CNBC News Update with Contessa Brewer. Hi, Contessa. Morgan, in a rare sign of potential cooperation between the U.S. and China, Reuters reports both countries will soon double the number of weekly flights currently allowed

between the two countries. The Transportation Department will reportedly allow 18 Chinese passenger round-trip flights to the U.S. per week and will increase the number of flights to 24 in October. This is up from the current 12 weekly flights between the countries. Sources say the Chinese government will agree to the same increase for American carriers. Microsoft is shutting down Cortana, its virtual assistant app on Windows, saying it struggled to compete with rivals like Alexa or Google Assistant. The company is now working on Windows Copilot, a new sidebar for Windows 11 powered by Bing Chat that should be available this fall. I can't believe my phones didn't just pop up with what?

What, Contessa? What do you want? Just because you say Alexa. Gladiator fights are making a comeback. Apparently, Italy, host of the first ones, are now ready to host Tesla CEO Elon Musk and his cage match with billionaire rival Mark Zuckerberg. I am not kidding about this. Musk tweeted that the fight will be promoted by his and Zuckerberg's foundations, that it will be streamed on. Well, this says Twitter, but you know that Elon Musk didn't call it Twitter X and meta. Italy's culture minister confirmed he's spoken to Musk about hosting the event, but said it's not going to take place in Rome. Well, he may have also said there will be no lions. I don't know. Well, if it's not in the Coliseum, then what's the point?

Right. But listen, there are unregulated sports books that have already reached out to me and said, oh, by the way, we're going to get in on the betting action on this for sure. All right. Sounds like a future story or maybe a couple of them for you, Contessa Brewer. But again, I mean, come on, Coliseum. All right. Thank you.

Let's bring back Michael Santoli for our own gladiator. That's what the that's what the teleprompter says. Our own gladiator, Michael Santoli, for a look at the labor market. I'm waiting for you to give me the thumbs down here, but never mind. This is a chart that our friends over at Goldman Sachs, actually Tony Pasquarello, distributed today just comparing the percentage, the federal deficit relative to GDP. Right. So how big is the deficit compared to the size of the economy against the unemployment rate? Right. So this was obviously during the pandemic when we had a massive surge in federal spending and record, almost record levels in the postwar period of spending to GDP. It has declined from there, but still at these very high levels. And you see these spikes. That's the Korean War over

there. That's during the Vietnam War. Down here is the late 90s when we ran budget surpluses and unemployment was quite low. And of course, that's the global financial crisis. So there's nothing specific about this relationship that says what's the right or wrong level. But it's definitely a reminder of the power of the fiscal push we've gotten from deficit spending over the last couple of years, been maybe a kind of a missing piece in a lot of economic models, Morgan, as to why the economy has remained so strong. For now, the question is, can we have, can we enjoy this low unemployment without ongoing negative benefit, negative effects of the big deficits like sustained inflation.

Yeah, I mean, there's been a lot of talk, too, that maybe when you see a recession happen and the government has to spend more money. Yes, come over, come over. Thumbs up. I'm glad you said that because I just got, I just started going into my spiel here. It's good to have you on set. Always good to visit. Yeah.

Okay, so I just want to go back to this because there's been a lot of talk about the fact that, you know, if and when a recession comes, which at some point, you know, it will. And we have all this, you know, we have a huge debt pile and this low unemployment rate right now. What's it going to look like when spending has to ratchet up further again? Yes. This is what we don't know if the appetite is going to be there, if the borrowing capacity, given the interest burden on the federal government already, is going to be manageable. I think that most policymakers, including at the Fed, are saying, I guess we'll worry about that when we can. We're hoping to mitigate the effects on the economy of higher rates right now. And for now, there have been sustained benefits to the consumer and corporate sector of the stimulus that was put into the economy.

That's what the excess savings we talk about is about. That's what the, you know, consumer and corporate balance sheets in decent shape. That's part of where it came from. Yeah. And of course, maybe it goes back to this paper that was released from the New York Fed yesterday morning. It warns that the short-term R has jumped, which means that the drag from recent policy tightening hasn't been as large as previously anticipated, which I know is a pretty hot topic of debate right now. Exactly. So everyone's kind of figuring out what it means for the leads and lags in the economy. But look, the interest costs from the government relative to the size of the economy and the overall budget is absolutely climbing toward the upper end of

the range historically. What you hope to do is have the economy grow its way out of it. Because that's what happened in World War II. He didn't pay down any debt. He just grew the economy really fast in nominal terms, and it became much more manageable. Yeah. Well, don't miss more of Mike, along with Josh Brown, tonight. 6 p.m. Eastern for the CNBC special Taking Stock,

which some are calling an informative romp. I was going for a thought-provoking frolic, so we'll see what we land on tonight. All right. Okay. Make sure you watch and those folks on X and whatever other social media platform can weigh in on whether it's a romp or a frolic, I guess. All right. Well, Treasury rates rising after the hotter-than-expected producer price index. And our next guest predicts bond yields will head to the highest level of the current cycle.

He explains why. Let's straight ahead. Welcome back to Overtime. Treasury yields on the move again today after producer prices came in slightly hotter than expected. The U.S. 10-year yield now back near its highest level since November. And our next guest says he sees it heading even higher. Let's bring in Warren Pies, co-founder and strategist at 314 Research. Warren, it's great to have you on. Why? Why is it going higher? Hey, thanks for having me, Morgan. Really, a few reasons, but the big ones are supply and demand.

If you think about the first part of this year, we had strong economic data, but really there was very little supply issued. If you go back around the debt ceiling, the Treasury didn't have to issue much supply or was not able to issue much supply. That changes in the back half of the year. We're going to have about $2 trillion of issuance. If you think about who the big buyers of Treasuries have been, we've added $9 trillion to the federal debt since the end of 2018. That's a massive number. And the big buyers have been the Fed, really, banks, foreigners, pension funds, and leveraged head funds. And when you break down who's buying and who's not going to be buying going forward, the Fed's not going to be buying. Banks aren't going to be stepping up their buying. And foreigners aren't going to be buying.

Pensions are kind of a wash. That puts leveraged hedge funds in households in the spotlight. They're going to require higher yields. And then finally, look at valuations. So against nominal GDP, the current 10-year is undervalued. It's been suppressed by this lack of supply. And then when you think about where we're at in the Fed hike cycle, typically, and I think this is going to trip a lot of people up. Typically, you go into a Fed pause where we're at right now, and this is what we believe. Every other case, we've seen bonds, the long bond rally. That means yields coming down. I don't think that's going to happen this time. When you go into your typical pause, the 10-year is roughly equivalent to the Fed funds rate. That's your typical pause. And today,

we're well below. We're at less than 4.2% on two percent on the 10 year and five point five percent on the upper bound of the Fed funds rate. So you add that all together, I think rates are going higher unless the economy slows and we don't see the economy slowing just yet. OK, so so can we say that this is just a break from previous cycles that we've seen or represents kind kind of a new precedent in this world of quantitative tightening? Yeah, I mean, it's a little bit of a new experiment, a new monetary experiment. I think that the big question on everyone's mind is really, you know, how will the bond market operate with the Fed stepping away? And that's going to be the question that gets answered in the next 18 months. And all of these questions, all of these issues are interrelated.

So if you think about the returns we've seen since June 1st, commodities plus 7%, stocks plus 6% or a little bit under that, cash plus 1%, and the long bond, negative 5%. This kind of return pattern is not sustainable because what you need, the economy is going to power earnings and that's what stocks need. But as the economy grows, all the dynamics I talked about, yields are going to come up higher. You're going to see commodities drip higher as we've seen with oil and other things. And that is a negative feedback loop to stocks. So I think that yields rise for now and we have to see what happens down the road. But I think there's this feedback loop into the economy. So, you know, it's too early to say

there's going to be this new normal in rates. OK, Warren Pies, it's great to have you. That was a great explainer on a very difficult and dense topic. Appreciate it. Thanks for having me, Morgan. A big new tax battle is brewing in Capitol Hill that could impact you and popular payment apps. We've got those details when Overtime returns. Welcome back to Overtime. Side gigs and payment apps such as PayPal and Venmo are at the center of the latest tax fight in Washington. Robert Frank explains why. Hi, Robert. Hey, Morgan. Well, the House Ways and Means Committee recently approved legislation that would roll back the so-called gig tax. That's a tax that requires third-party payment apps like PayPal, Venmo, eBay or Airbnb to send 1099K forms to anyone reporting business income of more than $600 a year. It was supposed to take

effect in 2022. The IRS postponed it until 2024 tax year, which means income you receive this year from the payment apps could generate a 1099. Now, the House Ways and Means Bill would lift that $600 limit to $20,000, and a customer has to have 200 transactions a year. The GOP is saying, basically, the current law amounts to IRS surveillance and harassment of Americans who might, say, sell their couch on eBay or get reimbursed by friends for dinner. Democrats say only business income and not the reimbursement from friends or family members would apply, and the current law doesn't change what you actually owe, only what's reported to the IRS. So you've got to pay taxes on this stuff either way.

The Tax Policy Center estimates that up to half of all income that currently flows through these apps is going unreported and therefore untaxed. That adds to the tax gap, the $500 billion a year that goes uncollected. Now, one way to avoid all this, Morgan, is to use Zelle, which is exempt from the 1099 reporting. Whoa, why is that? Well, Zelle is a bank-to-bank transaction, more like a wire, rather than eBay, Venmo, all these which are considered third parties. So they got a carve out. And again, you have to pay taxes regardless wherever you get the income, however you use or pay for it. But Zelle is not subject to the 1099 rule. That is fascinating. So a lot of people have switched to Zelle. Yeah, there you go. And I'm sure the banks are excited to be able to have that carve out if this legislation actually becomes reality at a time

where for so many years now, we've heard the bank CEOs say that the fintech guys were not subject to the same sort of regulation. So maybe now it's a reversal here, at least where this is concerned. Robert Frank, thanks. The earnings parade continues next week when retailers like Home Depot, Target and Walmart take center stage. A top analyst tells us what he's expecting when overtime returns. We have some news on AMC. The company's revised stock conversion plan to convert so-called eight shares into AMC common stock has been approved by a Delaware court, which is sending shares of AMC sharply lower. Those are down about 28 percent right now. But it's also pushing the so-called ape shares sharply higher. Those are up 20 percent. Mike Santoli is back to break all of this down. I mean, this is we're kind of an uncharted

territory here in terms of this deal now crossing the finish line. A very unusual scenario. Now, it all starts with the fact that AMC wanted to issue more common shares a while back, they had a limit in their charter for how many shares they could issue in total. Shareholders voted against raising that limit. So they needed to find a workaround because they believe they have to raise more equity. They created the Ape shares with the full intention, it seems, of converting them to common shares. A few weeks ago, the same judge disallowed a settlement that would have allowed that conversion. So this is a new version of that settlement. And then now it's going to go through.

Why is AMC stock down because of it? Because once the Ape shares are converted into it, it's really a dilutive event for common shareholders. And the presumption is they're also going to do a reverse stock split. It's going to enable the company potentially to issue more stock and therefore dilute shareholders further. Yeah, we did see AMC earnings last week, and this is a company that is starting to see, you know, a recovery from the pandemic. Certainly some strong box office movies in recent weeks are, I would imagine, are going to help here, too. But Adam Aaron, the CEO, is also very, very blunt in talking about not only with earnings, but in the last time they tried to do this and it

was rejected. The fact that you have a strike going on, it's very unclear what's going to happen longer term with a content pipeline, and that's going to affect movie theater chain operators. No doubt about it. I mean, yes, we've had a good run of box office in the last few weeks, but the number of releases is well below what it was in 2019. The total box office is well below where it was in 2019. And AMC's market cap is well above where it was in 2019 because of the meme stock effect. That's incredible. In other words, the capital structure is wobbly at this point. And the company, in theory, should probably try to create a bigger financial cushion.

Yeah. So here we go. This key step for them to move towards that. Mike, thanks for breaking it down. Meanwhile, investors are awaiting a big week of retail earnings. Names like Home Depot, Walmart, Target, many others are reporting next week. Joining us now is BMO Capital Markets' Simeon Siegel. Simeon, it's great to have you on.

What are you watching for when we get this bevy of retailers that touch different consumers in different parts of the market next week? Good to see you. Nonstop fun in August in retail. So I think that next week we're going to see a continuation of this beginning where actually you're seeing fairly OK results. You're seeing beats. They're just not translating into the stock market. So generally speaking, a lot of questions about consumer health. So far, they've been OK. I think we're going to see similar types of results. And the biggest question is going to be, do the stocks react well or did we already get that run in the last two months? What do you think? Did we get the run already? beauty is, it should be winners and losers. And I know that's a nice thing to say. We haven't been able to say it in two years. So for the past two years, COVID has effectively ridden everyone's

boat and then it made them all collapse. Now we're going to find out who's good and who's not. There's certain, listen, yesterday we watched one of the biggest mergers in a very long time. We watched Tapestry announce that they're picking up Capri. Capri was a very cheap stock. The valuation had come down a lot. So there's a lot of divergence here. And I think we're going to see companies like Off Pricers, you had TJX up on that logo. I think they will continue to compound. I think you're watching people want value. At the same time, you're watching people want luxury. So it is interesting. Yeah. I mean, we have seen it in some of the results so far, the fact that maybe at least here in North America and in the U.S., the market, at least on the high end luxury side, has been a little bit softer. I wonder what you make of that

and if that, too, feeds into that deal that was announced yesterday. So first of all, it probably does. I think right now you think about Tapestry and Capri, that's primarily Coach, Michael Kors, and then also Kate Spade, Jimmy Choo, Versace, Stuart Weitzman. So different levels, but predominantly more in that accessible luxury price point. Tapestry, by buying Capri, gets access to Versace and Jimmy Choo, that higher price point that you're referring to. So listen, I think what we are seeing, the North America department store exposure right now has some problems, but it seems like those problems are more normalization post-COVID.

It seems like they've been working theirization post-COVID. It seems like they've been working their way through over inventory, much more so than the easier answer of people simply aren't shopping. I think we are seeing people shop when they're being given a reason to. We look across the companies that have reported so far, there's a low single-digit growth in revenues. Most companies are doing that and growing gross margin. So it's not even simply because of promotions. I think the customer is willing to shop if they're given a reason, and we're going to see a case-by-case basis for different retailers and different segments of retail who's going to do well.

That's why I bring up that divergence. That's why I think the off-price would be very interesting. Some others that are going to chase promotions, perhaps they don't have a strong brand equity, I think will tell a different story. Yeah, that's exactly where I was going with you, is how important are inventory levels going to be here? I mean, you've heard it from the freight operators who move all of these goods ahead of time and ahead of these key shopping seasons, saying, yeah, destocking has happened.

We're starting to see some green shoots in retail and in e-commerce right now. Is your expectation that the correction has happened and that many of these names that you cover are actually in a good position for back to school and for the holiday season? I think the easy answer is yes. The more nuanced answer is I think there's still going to be promotions. I think there's still going to be too much inventory for some. But it's not because there's a lot of inventory. It's because there's more inventory than the demand allows for it. And so what I mean by that is when COVID stopped all of the inventory from coming into the country, it didn't matter how good of a brand you were.

It didn't matter how good of a management team you were. You couldn't get your product. The next year, you had too much product. So there was no distinction between who was good at doing retail and who was bad at doing retail. Now we're going to get that distinction. And what that means, I think you and I are going to see balance sheets that look clean on paper. I think we're going to see year-over-year declines in inventory because of that fee stocking. But just because you have less inventory than last year doesn't mean you don't still have too much.

And that's where that demand forecasting is going to matter. Okay. I've got like 30 seconds left here with you. If you could pick one stock right now to buy, what would it be? Bath & Body Works. I think right now you've got discretionary spending with the benefit of a staple element because you buy a lot of candles, they're replenishment. And like Capri, cheap multiple. Okay. Simeon Siegel, thank you for joining me as we look ahead to not only retail earnings next week, but also retail sales, which will be one to watch. We also

get the Fed Minutes on Wednesday afternoon. In the meantime, I've just taken a quick look at the markets and where we ended the day. The Dow and the Russell both finished higher. Everything else was lower. In terms of gains on the week, it was only the Dow, the S&P and Nasdaq both finishing lower on the week. That is going to do it for us here at Overtime. Have a wonderful weekend. Fast money begins right now.