The Compound and Friends - Bearish but Priced In

Episode Date: March 31, 2023

On episode 86 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Jurrien Timmer to discuss what's going on with banks, what's changed since Jurrien's 2022 TCAF appearance, the Fed and the market, S&P technicals, gold, Bitcoin, and much more! Thanks to Public for sponsoring this episode. Go to https://public.com/ to learn more about their new Treasury accounts. Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Are you an audiophile? I am. You are. How come every audiophile I've ever met has terrible taste in music? Shots fired. No, like you- You ever- No, but you probably noticed this.

Dude, he's our guest! Stop. I'm not saying he does. I don't even know what he likes. You ever notice you're like- Someone's like, Oh, you have an audiophile. You're like, what do you like?

They're like, Emerson, Lake, and Palmer. I'm like, that's number one? Tip of your tongue? No, it's not a great band. No, but I know. But there's some- Uh, or you'll get a lot of Rush.

Yeah. And actually, to show off the sound system, they'll play Tom Sawyer, right? All right, so you know. Have you seen I Love You, Man? What? I Love You, Man? They like go in on Rush. Oh, yeah, they go in on Rush.

Yeah. No, I don't even hate Rush, but I'm saying. I love that movie. When did you become? I'm not an audiophile, but I'm saying I love that movie um when did you become I'm not an audiophile but I love music I I don't have like a

I don't have like a technical desire to know more about how it sounds how it's supposed to sound but when did you become an audiophile uh

when I was like a teenager let's do mic and head and headphones for your end guys so you're a teenager. So that's, is that eight tracks or cassettes? No, that was vinyl.

And my oldest brother, five years older, he went off to college. So he gave me all his records. There you go. It was like Genesis Delamplized down on Broadway. So old, like Yes, Moody Blues. So mid to late 70s prog rock steve miller band yeah that sort of thing so uh that's how i kind of got into it and i'm a closet drummer i play drums so i was

a drummer not very well but uh but that kind of i think tunes you into the the sound i was a drummer in a high school band and i went into on purpose we had like a mini reunion a couple of summers ago. We didn't play. We just drank. But we were reminiscing about the songs that we were playing. And we were really, I don't think we had bad taste. It was just the time period that we formed a band. The music available to cover was like just not cool. So it was 93 the band started. So that's post-grunge grunge yes so we're literally

playing urge overkill covers and uh like like we would like whip out a sister havana cover and uh what else were we playing it was like none of it was good yeah but it was just a funny time to be that was kind of a dark period for music i mean the 60s and 70s uh i'm reading a great book um called rock me on the water yeah about the early 70s la uh tv movie and music scene and the whole laurel canyon thing yeah it was very cool and actually did you see the movie uh i'm a serious man the cone brothers yes it's a great movie and the col Columbia Record Club, which actually still exists, they would send you an album every month and they would hook you because you'd pay like so much a month.

And the guy, the actor, his daughter is buying, he's getting Santana Abraxas. It's this guy. This guy's the lead. And so he's on the phone. I don't even know what Abraxas is because he hasn't paid his daughter's thing. But that was one of my first albums. Remember eight,

eight CDs for, for a penny. Remember that? I did that like 50 times. Yeah. And going to Tower Records. Hundreds and hundreds of CDs. Just perusing the albums.

You know, we used to go to Tower Records and they would keep the CD in like a two foot length plastic container. So you couldn't stick it down your, your pants or something. Last time you were on, we spoke about Laurel Canyon, or you spoke about Laurel Canyon. So I want to talk about this on the show.

Well, Crosby just died. Yeah. He was like the early Laurel Canyon. But it's interesting because that scene started with folk and country music and then you had the British invasion and then the Eagles kind of, they kind of like um

they kind of started to get more of a rock theme and they kind of uh i hate the fucking eagles man the the laurel canyon all kind of live together they all slept together jim morrison um yeah but like joni mitchell and uh you know um butrds were the most influential band of that era for the other people that lived there. Like, that set the whole thing in motion. Yuri, did you watch Daisy Jones and the Six? I did not. Okay, we'll talk about it on the show.

It's a 1970s rock coming of age from a band. It's a great show. I didn't watch that either. I did watch the Laurel Canyon doc, though, so I'm an expert. But you know what else? I did a driving tour of L.A. with my wife and kids, not last summer, the summer before, and they take you to that general store at the foot of the mountain. On the corner, yes.

You know it? Yeah. So it's, like, filled with Polaroids that were taken in the store of every one of those. Every rock star, like, used to buy their cigarettes there. And then they went to the strip to play at Whiskey A Go-Go. It was on the way down to the strip, right? But at that point, nobody got paid. It was a whole different scene.

It's about the music, man. It was about the music. That's what we try to do on this pod. We try to make it about the music. So far, so good. When was Yuri on last? He was on April 29th, 2022. Oh, too long. When were you on? When was you on last? He was on April 29th, 2022. Oh, too long. And I've got some receipts.

I've got some receipts. There were some takes. No, our takes, no, the takes aged well. There was nothing bad. Nothing too embarrassing. I'm sure my takes were way worse anyway. Well, here's one thing that you did say that I was definitely with you. Stop. No, you're like, oh, I'll take two and a half percent of my bonds. Yeah, I would have. Yeah, how would you take say that I was definitely with you. Stop. No, you're like, oh, I'll take 2.5% of my bonds.

Yeah, I would have. Yeah, how would you take five? I'd love five. Five's better. Five's better. I was thinking back then that the ceiling was probably three. Yeah, so was I. But things change.

I said there'll be a wave of buyers. No way it's going to— I mean, that was the story last year. It was one giant moving target. Yeah. When the information changes, I change my mind. What do you do, sir? I do the same thing.

That's right. Urien, we redecorated since you were here. You know what you were worried about a year ago, Josh? This used to be white. Oh, yeah, yeah. Are those lights new?

Yeah. Everything's new. Everything's new, except for us. Think about it. Hey, we've reinvented ourselves every day. That's true.

Last time we were here, Amazon bombed after the close. I was like, it's over. And spring 2022, that was, so we made the point that all these meme stocks peaked in February 21, but spring of 22, Q1 report for 2022, that's when the wheels fell off. That's when you had Teladoc or DocuSync, I can't remember which one, down in an 80% drawdown and then fell 40% after earnings. Like we were in it. That was like the real tech crash. That was – we were in it.

Well, we're a long way from there. What's the saying? How do you get a 95% decline, a 90% decline followed by another 50% decline? Well, it gets cut in half. Great. Josh, you were worried about the wealth effect. Yeah. How's that going?

Wealth effect is still with us. Consumers have... No, it's not. They're not changing their behavior. Consumers are not rate sensitive anymore. They're not rate sensitive. Most mortgages were originated in 20 and 21, so they've termed out their debt,

so as long as they don't have to sell their... What if I tell you, what if I tell you I think there's an argument to be made that hiking rates 450 500 basis points actually is a form of stimulus Certain for a certain portion of the country that now really feels the wealth effect. Wait, what do you mean because their cash is paying them? I

I'm starting to think that way you're gonna get a little close to the mic, please? That's interesting. Or we could hold the arm close to him. Yeah, yeah. Thank you, John. Right? Like if you're 60 years old and you've been sitting with a million dollars in cash for a year, and now all of a sudden your cash is yielding 5%,

do you have a little bit of a wealth effect mentally as a result of that? You feel a little bit better? I think psychologically you do, even though your inflation is running at five or six as well. But I think people don't think in those terms, right? They don't. It's like earnings. Nobody thinks of earnings in real terms. Right. So like from that standpoint, you could picture a scenario where a certain portion of the country that happens to spend a lot of money kind of feels like this is better than how it was last year. As long as they move their money out of the banks,

which are still paying a half a percent. And the big banks are paying even less. We're definitely going to talk about that today, too. Jeff Kleintop had a good tweet about that that I want to talk to you guys about. All right, how are we looking? Almost. Testing.

One, two, three! Yeah, testing. One, two, three, four, five. Sounds good to me. Where are you going for dinner tonight? Anywhere good? My niece runs a restaurant called De Noordwijk, a very good Dutch name in the West Village. I think it's on Bleecker Street.

I'm not sure. She's a manager? She's a manager. Oh, wow. She was at 11 Madison Park, and then she left, and she's now running this restaurant. And so I'm actually – I'm sure you know Jim Bianco. Of course. He's joining us because we're both panelists tomorrow at Game Forum, which is this big conference. I know Game Forum.

Quinnipiac. Yes. Tell Jim we said hi. I've spoken there. Can you say hi to him for us? I will. I will. So I'm meeting him at 7. So we're going to take him out to dinner and tomorrow we'll be on the panel. I went to dinner with... I don't think you're going to have to talk a lot.

I went to dinner with Jim in Miami a couple of weeks ago and man, that guy loves the market as much as we do. So he and I kind of grew up together in the markets, not like as children, but since the 80s I've known him, I briefly thought of actually using his company like to launch my own sort of research business. That was like 30 years ago.

But so we kind of grew up in the markets together. So I've known him for a very long time. He's great. And the first exposure I ever had to him, Barry put him on stage at like – we to do a conference for barry's blog the big picture conference and bianco just went on for like 40 minutes oh he's gone for four hours he's got so much knowledge of force i think he went through 200 charts yeah and the the room just like nobody looking at their phone nothing and hey you know what we literally did this a year ago about jim yeah no but it's worth but he's pointing. I think he and I have some similarities,

even though we come at things slightly different. He's a little bit more of an anti-Fed type. He's more of a Chicago person than I am. He's a Chicago. He's a Chicago school. But we both do all of our own research. I love your charts. And many people at our level and our profession,

they have people do it. Well, you can tell from your charts and from Jim like at our level in our profession they have well you could tell from your charts everything and from gyms that you're both doing the work and you both do top down and bottom up yeah not a lot of people he also has that really hoarse voice it's like a little springsteen i kind of like that and and he is turning that working class rasp going he's also turned into a gearhead like i'm an avid cyclist and he has become a super monster cyclist and he's like telling super monster cyclist. And he's like telling me what, what gear, like just the new components he just got. And my wife just got into cycling and she is like a monster. So tonight's going to be a geek fest on cycling.

Oh, cool. How many miles do you ride at a time? Um, I'll, I mean, I, I did the, we have this event called the Pan Mass Challenge in Massachusetts, which is a charity bike ride for cancer research. It's 200 miles in two days. And this August will be my 25th consecutive year riding it. Wow. So that's how long I've been riding. 200 miles in two days? How do you train all year round for that, right?

And now that I spend time in Santa Barbara, I have a West Coast bike and an East Coast bike, so I can ride year round. So no more spin classes. All right. Now we're fully intimidated. Let's start the show. All right. What do you think? Three o'clock.

All right. Put my mic on! Episode 86. Welcome to The Compound and Friends. All opinions expressed by me, Michael Batnick, and our castmates are solely our own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Hey, guys.

Today's show is brought to us by our friends at Public. I want to talk about the Public app. I just downloaded it myself yesterday. And within probably less than two minutes, had an account created and was on my way to buying treasury bills, direct treasury bills, not a money market fund and not a mutual fund. Public is a brokerage app. You can buy, hold and sell thousands of assets like stocks, ETFs, crypto, collectibles, etc. But they just launched this thing called treasury accounts. And the yield that I was able to lock in, this is gross of fees, was 4.89%.

I moved money from my bank account, which was a checking account, probably yielding zero. And within a couple of minutes, I own T-bills. And Public says there are no minimum hold periods or settlement delays. And because it's government backed treasury bills, it's an incredibly safe place to park your cash. You could buy treasuries on Public. Treasury bills are held securely in custody at Bank of New York Mellon. That's the world's largest custodian bank. And I think the other thing that I want to mention here is that Public will automatically reinvest your T-bills at maturity. So you don't have to sit there counting down the days to six months is over

and then have to deal with rolling it yourself or buying a new T-bill. So it's a pretty cool thing that they started doing. I'm giving it a shot myself personally. Go to public.com to learn more. This is going to be a huge episode. I've been looking forward to this one for a long time. We have fan favorite Urien Timmer back on the show, everybody. Welcome to the show. We have like a serious introduction for you. I want to get it out of the way because we want to get right to the content, okay? All right. Urien is the director of global macro for Fidelity Investments. Urien has more than 35 years of experience in the investment world and is a 25-year veteran at Fidelity. That around.

He first joined Fidelity as a technical research analyst in 1995. On the fixed income side. So it's 28 years. On the fixed income side. I was a fixed income technician. I mean, can you think of something more obscure than that? Wait, 28 years. Where'd we get 25 years? Nicole. Old bio. All right. But also now you're like almost a celebrity. John, can we put this on screen? Oh, no. A new super cycle is starting, says this macro strategist. How to invest. Look at you.

Barron's, yes. Was this on the cover? It was not on the cover, thank God, because I would have become the contrarian cover indicator. February 23. What was more important than you that week? I don't remember. All right, whatever.

This is cool. People call you? I know you've been in the print before but i'm saying like this this was a pretty big thing i got a few calls from all the acquaintances hey you're in barrens what was this what's the super cycle very very all the queens super cycle is it's not not what you think we talk about bikes is this bikes or market super cyclist good one secular trends you know 30 year cycles so okay to Barron's, and basically you were saying a recession call would be obvious, seem obvious here with the Treasury yield the most curve, the most inverted in 40 years, and the Fed intending to take interest rates above 5%. Every time the Fed has gone that far into the restrictive zone, two to three percentage points above a neutral rate,

we've had a recession. The valuation of the S&P as measured by price earnings multiple declined by 31% last year. The question is, how much is priced in? Okay, you tell us. How much? Did we price the whole thing in already? It really comes down to the earnings, right? And the earnings have held up. I mean, the growth rate is way down. It's about flat to down a couple of percent. But earnings and revenues have held up because the economy is still doing okay. And we talked about this before the show. And I think a large part of, a large reason is that consumers have turned out. Like, they're not as sensitive to interest rate risk.

So the Fed is hiking. But corporates kind of refinanced in a couple of years ago. Most mortgages were originated in 2020 and 2021. So it takes longer for the Fed's tightening campaign to have an effect on that part of the economy. But of course, as we've learned in recent weeks, the banking side is feeling it already. Is this the thing that we're going to look back and say, this is what everyone got wrong? It turns out the consumer in this cycle was way less sensitive to the hike in weights than they had been in prior cycles. Corporations, too.

And corporations. And corporates, too. 75% of the S&P 500's debt is long-term fixed. So that's the, is that the, like, let's say you're teaching a class, an economics class 10 years from now. Do you think that thing that we just said will be the thing that you'll point back to and say, this is why everyone got it wrong? I think so.

And the irony, I think, is, you know, the Fed raises rates, the yield curve goes upside down, you get, and we see now that some banks have that asset liability mismatch, but not the consumer and not the corporate sector. The consumer, of course, is 70% of the economy. You're seeing cracks here and there, but not where it really counts. We're seeing layoffs mostly in the tech sector, but generally speaking, the unemployment rate is still super, super low, the lowest since the late 1960s. So people have jobs, they have income. Yuriy, I keep asking, is it possible to have a recession without unemployment rising? I doubt that we've ever really had one,

but I would have to check that. That would be so bizarre. It would be bizarre. And I think, you know, if would be bizarre. And I think the Fed would love to get an outcome where it neutralizes the imbalance between jobs available and jobs being sought. The Joltz report shows basically two jobs for every one seeker. And I think in the Fed's mind, they would like to get that down to a neutral zone without actually the unemployment rate going up. But historically, that usually when you have a recession, unemployment rate goes up a couple of percent. So a year ago, this morning, I was listening to our show from a year ago, and you said in April 2022 that fears of a recession are overblown. It was consensus back then. It's consensus today.

Where are we today? What do you think about the impending recession? A year has gone by. It's the same thing. It's stal today. Where are we today? What do you think about the impending recession? A year has gone by. It's the same thing. Well, and this is the problem with the yield curve is that it has perfect accuracy in terms of the validity of the signal, but it's notoriously difficult to pinpoint the timing, the magnitude, the duration of the following recession. And I think now with Silicon Valley Bank and that whole thing happening, you can maybe look at that as being a catalyst, not that banks are going to go under, but that maybe you get a little bit of a credit crunch because smaller banks might be less inclined to lend

because, A, they're seeing deposits go out the door, which means their capital ratios get impacted, or they need to compete for those deposits against money market funds or T-bills. And then that might affect their behavior as well. So we had the yield curve signal. We had the monetary aggregates going negative. I mean, historically, it's hard to argue that that's not going to lead to a recession. But the timing is unknown.

And a year ago, I mean, we basically concluded that, that don't hold your breath. A, it could be priced in already. And B, we don't know when it would happen. But now you can kind of start to connect the dots that even if SIVB was a one-off, it could affect behavior. And lending standards have already gone up in the banking sector. And maybe they will continue to go up. Although I would point out that as money leaves smaller banks and goes into the super large banks, they have no incentive to compete with money market funds because they're getting

all these deposits. So really big SIVs, the systemically important banks, maybe they can get away with paying zero or 0.1% on their deposit. Most banks can't. Those five can. Yes. So I won't spend the entire show talking about what we spoke about last time. But what's really different from today, and we have this table in here, if like the S&P is more or less at the same spot. It's 6% lower. Bitcoin is 27% lower.

But the yield on basically every part of the curve has changed dramatically. The six-month was 1.4%. Now it's 4.9%. I mean, that is dramatically different. But when we spoke last year, I said to you, where are the blowups? Because we were talking about the fact that bonds in April had the worst start to a year of all time. The ag was down 13% just in the first four months of the year. And I said, in 1994, Orange County blew up, right? They just, they blew up. Where are all of the blobs from this yield curve? And it took a year for that to real, it took a year. Well, but again, the duration mismatch was of course already starting to happen, but the Fed was a long ways from getting to the short rates where it is now.

But SIVB happened because they started losing deposits because the easy money era went into reverse, and so that deposit growth went into reverse. Then they got upside down with their capital ratios. They have the worst clients ever. Go on. They have the worst clients ever. Go on. But then the bonds went from the hold to maturity bucket to the available for sale bucket. Which is a hit.

They got a capital hit. They had to raise capital. It was really mismanaged. And then, lo and behold, within a day, you had $50 billion leaving the door. And so that is a pretty unique situation. Like when you put a scatterplot of deposits and bond holdings of the banks, the SIVP was really an outlier and there are not a lot of other banks that kind of match that description. So it took really the deposit side to flip that narrative around. And that just happened. Were you sitting, tell the truth. Were you sitting in your office at Fidelity with all the publicly traded brokerages down 20%, 30% and being like, thank God we're not publicly traded?

And we're not a bank. Well, I understand. But still, there are deposits. You would have been treated like one. They're not bank deposits, but there are people with capital infidelity. And then there are the need to invest capital into treasuries. But Josh is right. The stock market would not have differentiated between you and Schwab if you were publicly traded, even though you're not Schwab.

If FIDL was trading, your stock would not have been up. Yeah, but I mean maybe in the initial reaction, but the fundamentals always win. And if all of our customer dollars are invested on behalf of the customers in their name, in their assets, we're not doing things that banks would do or like an FDX where we're like playing fast and loose with deposit. So that wouldn't happen. And so even if there was a reaction, the market would quickly fix that. Definitely. Do you or any other analysts or strategists working at Fidelity get a look at inter-firm fund flows? What are people actually doing with their money? What are RAs doing with their clients' money? Is that important to you or is it just interesting anecdotally?

It's interesting anecdotally because you get a sense of what's on people's minds, how they're moving their money around. And so, yeah, we do see that. We don't trade on it or anything like that. No, of course not. But, yeah, I mean, we have $11 trillion of customer assets. Right, it's a meaningful pot of money. You also work with every type of investor on earth.

Us included. Us included. But I'm saying, like You also work with every type of investor on earth. Us included. Us included. But I'm saying like you work with professionals, you work with retail, high net worth, low net worth. So it might be, there's a lot of data in there. Yes. I think one of the biggest questions on investors' minds, at least we've been talking a lot about this,

is what does deposits leaving to money market funds do to banks, to their earnings, to their willingness to lend. Jeffrey Kleintop, I don't know if he's your counterpart at Schwab, but he had a tweet this morning that was really, really good. He said, yeah, but Jeff's bald and I do like the balds. Jeff said, unlikely that banks will aggressively hike deposit rates at the expensive margins. Bank deposit rates have not historically tracked money market rates in the US. So the chart that we're looking at that Jeff tweeted was there's been periods, at least certainly from 16 to 19, where money market rates were significantly higher than what banks were paying. Investors didn't care. I would argue that this time is probably a lot

different than 16 to 19. But how do you think, do you think that inertia wins out? Like, do you think that all the money that went into money market funds of the last three weeks, and it's a lot, is that, is that tide going to slow? Like just on the surface, the peak in rates from 16 to 19,

what, what is this fed funds? Two and a quarter. Yeah. Two and a half. Yeah. And now it's five. Much different.

So of course this is different. I have a very similar chart to that, that I posted last week, but so the banks are always behind the curve of raising their deposit rates when you're in a tightening cycle. And money markets are usually behind the curve as well because you have to wait for stuff to mature before you reinvest it at a higher yield. So there's always that lag.

And we had the same thing last year. I mean, not on purpose or anything, but that's just the way the math works of stuff maturing and getting reinvested. But I think we're in a two-tiered banking system now. So if you're one of the really big super banks, you don't really need to compete with money markets because you're getting the cash in. And for most people, like I have cash at a bank. I'm not looking at rates every day because it's just your working capital.

But if you have strategic cash that's there meant to earn something, then I think that combined with the headlines about smaller banks seeing deposit outflows, I think it's making people more aware that there are alternatives. making people more aware that there are alternatives. And maybe, you know, and actually Jim Bianco had mentioned this to me a few weeks ago, that it was when short rates went to five that it seemed to like, you know, an alarm bell, a bell rang, saying, oh, wow, I can get 5% on my money. That's right. It's a big, fat, round number. Mathematically, not specifically important to anyone, but like just hearing the word, wait, five, what am I getting? That's – it triggered people actually looking, which of course was going to trigger deposit flight.

How could it not? But so is that going to cause a recession? Are banks going to be less willing to lend? Yes. I think that that would be the kind of the smoking gun I, now for, OK, how do we make sense of the inverted yield curve and shrinking monetary aggregates? And now, again, not across the spectrum of banks because I think large banks don't have this issue, but regional banks, smaller banks, community banks. I think if they get more concerned about their deposits flowing out and they need to compete for those deposits, they're going to have to raise their rates, which would undermine their NIMS, their net interest margin, while at the same entities by the Fed in the aftermath of the financial crisis, which ironically solved the credit quality problem but never solved for the duration problem of buying bonds at 1% and seeing them go to 4%. Yeah, there's two reasons why, to me, this is like distressing.

The first is, I think like 60% of all the new job growth historically, like over 20 years, has come from small and mid-sized enterprises. So 500 employees and less. That's who does business with local banks. That is who is going to have trouble accessing working capital or

anything really, more revolvers. OK, so that's one. The second one is CNI loans, commercial real estate. Again, this is the bread and butter of the regional bank. It's not that JPMorgan Chase won't step in and make some loans. It's that they're not looking for a 20-person construction firm, and it wouldn't move the needle for them anyway to do those types. Somebody has to do them. If it's unprofitable for anyone to do them, that seems very problematic to me.

Yes. What's your take on that? I agree. So you have the SABs, the systemically important banks, and then the super regionals, The SABs, the systemically important banks, and then the super regionals. And all of those banks, I think, are relatively immune from this. But the smaller regional, the community banks, that is where most of the loan origination comes from. And if they are getting squeezed on their capital ratios because deposit growth has reversed or at least slowed down as money goes either to larger banks or to alternatives. And part of their assets, I mean, these banks obviously make mortgages and they lend money. They don't all buy bonds and MBS. But that's the classic asset liability mismatch.

And normally, the Fed would have an easy answer to this, just cut rates to 2%. And it makes you, you know, and normally the Fed would have an easy answer to this, just cut rates to 2%. And it's over. Like the nightmare is over, but the Fed has to preserve its hard fought credibility on inflation. You seem to regard this banking thing though, as something that like we'll get through and not being like this thing that's like a secular headwind. This is what you said back to Barron's in February. So a new super cycle is starting. I'm going to have you define that. But you said if the low interest rate era has ended,

I think we would all agree that it has. LOL, there'll be cutting rates next month. It may well mean that the secular trend has changed from the mega cap growth stocks, which dominated in 2014 to 21, to everything else, such as value, small cap commodity, international. This also happened during the original 50-50 era of the 70s and again. So that sounds reasonable to me, except it's gone in reverse. The NASDAQ is now three straight months of outperforming the S&P. I think it did 8% versus 2% in March if we were to close here.

So it seems like this banking crisis sort of like threw a monkey wrench into the everything else trade and everyone ran back into the cash-rich FANG stocks. But maybe that's countertrend and what you're talking about is the real trend. So I'd love for you to talk about your super cycle idea and then kind of answer that rotation question for me, if you could. Yeah, absolutely. So there's the cyclical. So the market cycle, four or five year cycle, we will all like know about the four year cycle of kind of growing up as Jardist. And then you have secular trends. So super cycles. 82 to 2000. Exactly. And those tend to be 15, 20 years.

And for the stock market, secular bull market means you go up. I mean, you go up and down like any other cycle, but the ups are bigger than the downs and they last longer. And you end up compounding at almost twice the rate that the market normally does, about plus 18 versus plus 10. And secular bear markets, they tend to last about 14 years, and the market tends to kind of not make a lot of progress. And in real terms, it tends to go down.

PEs tend to contract. And so you can apply that, those super cycles to— What are the—just give people quickly. What are the secular bull markets, 82 to 2000, 45 to 68? So 21 to 29, that was a short one. 21 to 29. It was short in duration but very big in magnitude. And people can define it in different ways.

But 49 to 68 is one, 82 to 2000. And then in my view, 2000- Well, people say 2013 because that's when a market first made a new high. Or 2013 truthers. I say 2009, but again, it's not an exact sign. If you say 2009, this would be the only secular bull that's ever been measured

from the previous bear market's low. Because you don't do 70, you don't do 70, 74 to 2000. The way, the way I define it is I run a, an exponential regression through the same. So the real return going back to 1871. So that's your trend line. And then the market at peaks is about a hundred percentage percent above that trend line. And at secular troughs, it's 50% below. In 2009, we were 50% below. And that was only nine years. So that would be a short secular bear.

But there is no right or wrong answer. It's in the eye of the beholder. Yeah, we're interpreting in the end. As long as you have a robust process. But that's my progress. So you do a trend deviation against that 150-year trend line, and you see plus 100, minus 50. That's the case. Okay, so that's the secular bull versus secular bear.

The secular bulls last longer. They contain cyclical bear markets within them, but they're short. They're sharp. Okay, so that's the secular. So in a secular bear, for instance, the cyclical bull market is two years for about a plus 75% gain. And then the market goes down for two years, right? And down like 30 to 50%. In a secular bull market, the market goes up like the four-year cycle. It goes up for three and a half by 150% and then goes down for like three months or six months by 20%. And so it's the skew of the cycle gets completely lopsided during between secular bull and bear. So your job as an investor is not to predict necessarily the start and stop because a lot

of this is hindsight. It's to mentally prepare yourself for the fact that you might go eight years investing in a stock market that ends up going nowhere. But if you keep doing that, when it does break into the next secular bull market, like you will make more money than you ever imagined possible. But that's like you're kind of like as a retail investor, that's your job. Like, so having this knowledge in advance, like, hey, this is this is how it works, and it's the luck of the drawer, and we can't control where we are. We just have to acknowledge that things will change.

Yes. Okay. So now what's the super cycle? If that's the secular, then tell us about cycle versus super cycle. So that's for the overall market. And of course, you have the same thing for bonds. We've been in a secular bull from 1980, 82, all the way to last year. But you can apply this to the different styles. And so what we see is that periods of above average inflation, if the average inflation rate is 3%, going back 150 years, inflationary periods tend to favor value stocks, commodity-sensitive stocks. Commodities tend to outperform financial assets.

In those periods, PEs tend to come down. It doesn't mean the market goes down, but valuations come down. So far, we've seen that. Yes, and we've seen that. For me, the big secular call is, A, is the secular bull market for stocks? Did it end? Because we now have inflation interest rates. We don't yet have higher highs and higher lows on a monthly chart. But it's hard to see 10-year yields go back to like half a percent or 1%. So maybe we're kind of in a flattening out period for rates and maybe inflations stay structurally

high. Those periods tend to cause multiple compression for stocks. They tend to see value outperform growth, non-U.S. outperform U.S. and commodities outperform financials. And when you look at the ratios, right, value to growth, for instance, and large growth. Small value to large growth is kind of the extreme version of that. You do a 10-year rate of change, like a CAGR, a compound annual growth rate of the relative performance. What you'll see is that there is a super cycle cadence of about three decades, which is a long, long time. I mean, don't try to day trade a 30-year cycle. Our listeners aren't worried about 30 years. I'm looking at a 15-minute chart right now.

What are you talking about? But if you look at that 10-year rate of change, compound rate of change, there's a really nice cyclical, super cyclical pattern there. And so we are not only at the time point where it's been 30 years or three decades since the last one,

but the magnitude of the rate of change is at the same level. And that's true for CRB versus S&P. When's the last one, 2000 to 2009? Yes, that was the last inflationary period. That was that super cycle where emerging markets, iron ore, gold, oil. China joined the WTO. The 2000s was all about EM. EM was—

Bricks. Bricks. Okay. And so we have—and again, this is not a timing tool, but I look at the chart, and there's a nice resonance. And when I flip that around, and you mentioned the Nifty 50, I've done a lot of work on that, and we've kind of calibrated our own data set of the 50 largest companies, which of course includes- Today's Nifty 50. Today's Nifty 50. And so when- We can all guess what's in there. When you calculate the ratio of the top 50 stocks versus the bottom 450 by market cap,

again, early 70s was the original Nifty 50. Everyone got burned by the speculative bubble of 1968 and then the recession of 1970. So the whole market was in the hands of big institutions, and they would only buy like the Xeroxes and the IBMs. Which they thought at the time they were being conservative. They thought they were bulletproof. They were one-and-done stocks, and their earnings were bulletproof. They survived the 1974 recession, but then their PEs imploded during the second half of the 70s. So that was the first nifty 50. Then, of course, the dot-com era, the mega cap

growth was the second one. And then 2014 to 2021 has been the third one. And again, I'm a chartist. I look at the chart and it has like this perfect cadence cadence. Then it reversed early last year when these big cap growth What chart are you talking about? This is my own proprietary chart, which I'm happy to share. Yodi and Nifty. But the Nifty 50 versus the rest of the market, so it's a relative performance. That trend line broke exactly as this super cycle in value and commodities was kind of setting itself up for a reversal. So I put two and two together, and it's not a precise timing tool. Like you said, right now, the big stocks are outperforming. A little bit of a reversal.

But I see that as a countertrend, cyclical versus cyclical. I think that's what everyone wants to hear, like your take on that, because this is like a very big question now for the markets we got used to amazon alphabet meta being just massive underperformers and the market was kind of okay with it like for the last 15 months well yeah but the equal equal way it held up industrials made new highs yes it was it was a pretty broad market. Now it's not so much, right? The Russell 2000, the SPW. Terrible.

It's like Bizarro versus last year. They don't look great. And actually, if you look at just the top 10 versus the bottom 490, and we crunch these numbers every day, it's the exact opposite, right? The top 10 are going like this. The bottom 490 are going like that. So I'd like to ask your take on this. So you just mentioned the fact that these giants are coming back.

To the point about the early 1970s, Microsoft and Apple are now 30% of the S&P. The last time the top two stocks were that big was AT&T and IBM in the early 70s. What do you make of the recent strength in mega cap tech? you make of the recent strength in mega cap tech? I think investors are reading the tea leaves of the yield curve, the money aggregates. Now, the banking pressures, obviously, that's affecting the banking stocks. You look at the KRE, it's a mess. And they're flocking to what has worked in the past when earnings growth was very slow. Here's Apple, six-month high, breaking out. My theory was these companies also have a lot of cash, and cash is king once again. Michael didn't like that theory.

No, I thought you were kidding. No, I was dead serious. They have cash. In other words, they don't need to tap a bank. They certainly don't have to sell bonds. Apple does not have to do anything. Look, these stocks are non-cyclicals, right? They're secular growers and they have margins.

And of course, margins for the S&P are compressing because inflation is eroding the bottom line. The top line is still okay. S&P revenues per share still making – still they're stepping to new highs in nominal terms, not in real terms. But so investors are flocking to the non-cyclical growers with proven free cash flow growth and good margins. And of course, last year, we had the defensive sectors do very well. Utility staples, they got really expensive. And so I think investors, and while the FANGs got relatively more attractive.

So it's understandable that that rotation is taking place. But my sense is that, for instance, utilities are now trading at a discount again. So I'd rather hide in kind of the really boring stuff if I believe that there's a recession that's going to knock earnings down. And based on my charts, I could see earnings down 10%. This year, not the end of the world at all, but I can see some earnings. So this is the NASDAQ 100 that I'm holding on my computer for you, Arian. It's at the highest it's been since August. It's breaking out of the range that it's been trading in.

Is the market getting it wrong? Is the market looking forward to rates? Yeah, the technician in you must be torn. Is the market looking forward to rates coming down? What is the market looking forward? Everyone's pessimistic. What are we all, like everyone's pessimistic. What are we all getting wrong? This has been the great challenging question for really the last six months or so is, you

know, 2022 was this massive reset in the cost of capital, right? The Fed raised rates. That lowers the present value of future cash flows for bonds, stocks, crypto, you name it, everything. And so that was the great valuation reset. But it was not based on earnings. Earnings held up OK. I mean, the growth rate was 8% last year. It was multiple contraction. It was all multiple contraction, which is what happens when the cost of capital goes up. You plug it into a discounted cash flow model. You've got earnings in the top, interest rates in the bottom, and the valuation is the present value of future cash flows. So this year, that reset has happened.

It's behind us. But now we need the E to hold up in the PE. The PE went from 30x trailing earnings in 2021 to like 15, 16, much, much better. You flip the bond yield upside down, you get a PE for bonds that went from 20 to 150 and now back. So this is the great thing, especially if you're a younger investor and you're just starting, you actually have a much better menu of choices now because valuations are back to normal and not at those super financially repressed levels from two years ago. But now, you know, the economy needs to hold up.

And if it doesn't, how much do earnings go down? And in inflationary periods, nominal earnings tend to go down a lot less or not go down at all. But investors are not fooled by that. So they pay less for those earnings through lower PEs. And so the question is, how much of this has been priced in? Like the market is perfectly capable of looking through an earnings decline if they see that the liquidity environment is going to bail them out, right?

When you look at financial conditions versus earnings growth. Yeah, because it's not a cliff. If you're a long-term investor, people talk about the earnings cliff. It's a valley. It's not a cliff. There's a cliff on the other side. And market timing is always so hard. I've been doing this almost 40 years and I'm like,

my 401k is in a target date fund. I don't even trade it anymore. I've given up. I also sit next to the portfolio managers who manage those funds, so I keep an eye on them. So maybe we did the show backwards. Let's start over.

John, start the show over. We're going to go through the charts now. We've got like 20-year charts. Why don't we just run through them? Yeah. When the Fed cuts, the last hike is often but not always quickly followed by a cut. Yes. Well, we don't know the last hike.

It's possible that this was the last hike. They certainly left the door open for that. Let's look at this chart. It's either the last one or it's almost the last one. But I think we're getting to the end. But what's unusual is, and I think we have the other chart as well, but historically, and you mentioned this in the opening,

the Fed will go, if our star or the natural rate of interest is neutral, which I think is a pretty valid approach, the Fed is like a pendulum that swings through our star, right? So two to three percentage points below it during easing cycles, two to three percent above it during tightening cycles. And the only time that the Fed stopped at neutral and then eased again was 2018, the famous Powell pivot. And now the market is pricing in that the Fed is going to only stop. Yeah, that's the S&P as of the last hike. And you can see it's a mess. There is no clear indicator there.

And that's what I was going to say earlier in terms of market timing. Even if you know perfectly what is going to happen next- You don't know how the market will react. You don't know how much of that is priced in. Can I describe this for people watching? So you're showing here the last tightening, and you're using that as kind of like a zero line. Yes. And then you have every year in which it was a last hike, the S&P 500 performance over the next, what is it, year? Yeah, a couple of years.

And it ranges from negative 60% or worse to positive 80%. And it's like a spider web. There's a line everywhere you look. There is absolutely – let me hammer this home for the listener. Watch this on YouTube, by the way, there is absolutely no predictive power in knowing that the Fed is about to stop hiking rates over a 12-month outlook in terms of what the S&P 500 will do. So again, the market's driven by the fundamentals of earnings and liquidity. And manipulation.

So the market can and will look through an earnings valley as long as the Fed is pivoting through a more friendly liquidity environment because they can just look forward saying, okay, well, the monetary environment is going to ease. Therefore, earnings will rebound. So, the market did that in 2020. It bought them six months before earnings. It did it in 2009. And so, if the market is right and the Fed, you had the previous chart up put the junk and go back to But hold on. I want to say this one's for the second. Yeah, first of all Josh is 100% right coming out of the pause After the pause it's all over the place It's a shotgun going into the pause the market or they're going to the last tightening the market

Don't has been rising in the first pain first half of this screen the market anticipates it. Yes The market is a trick to this though. The market anticipates it. Yes. There's a trick to this, though. The market is typically rising. Well, the market always anticipates, not always correctly, all right? People think the market's always right. No, it's not. It's a reflection of what everyone thinks, and what everyone thinks is not always correct. But there is that rising trend. The market does an 11% yearly CAGR. So you have to detrend it in that sense. But on this chart, you can see the market now expects the last hike to be the last hike.

And for the Fed to pivot all the way- We're looking at the dots. For the Fed to pivot below 3%, that's the SOFR curve. And my guess is the market is wrong on that because either the Fed's going to— I'm sorry, Urien. You're saying the market's expectation is that— The orange line. Is that we will be cutting immediately.

Yes, correct. This looks like. Yes. Do I have that right? Yes. Okay. And you think that that's where you differ from the market's current expectation. I think so.

If the Fed did not have an inflation problem, then yes, the market would be right. And actually, the market would be wrong because we'd be going down to 2%, not 3%. When you say the market, we're talking about the bond market. I'm talking about the bond market. But the bond market is the pricing mechanism for all markets. So it's the market. But because we have a persistent inflation problem and the Fed, by the way, has the biggest ALM problem of everyone, asset liability mishap. The Fed is sitting on a trillion-dollar unrealized loss on its balance sheet. So between the inflation credibility, which the – Can we – let's give that like 10 more seconds.

The Fed is sitting on a trillion dollars in unrealized portfolio losses. Correct. Why? Because QE was done when rates were 1%, 2%. So they bought bonds at low interest rates. Yes. And now they're paying four and three quarters on excess reserves. And so the Fed is as upside down as any bank.

So they'll hold those to maturity, though. They will, but of course, the Fed will never have to sell those. And QT, of course, quantitative tightening, just means bonds are not rolling over. So they don't have a real issue. But the Fed has been paying the Treasury through its TGA account, the Treasury General Account, hundreds of billions in gains that it earned through QE that it paid back to the treasury. That's all gone now because there are no more gains. What is that quarterly?

Do we assess it quarterly, how much we owe back in gains? The TGA is a daily balance, which the treasury is now depleting because of the fiscal cliff, because of the debt ceiling, right? The treasury is out of money. So it is running down its cash balance. But the issue is not like a direct capitalization issue. The Fed, like, we're not going to go insolvent. But it could add to a credibility issue in an era where rates are rising.

It's consuming more of the congressional budget to pay debt service. And we have the debt ceiling thing. We have a pretty— Well, time out, though. They are the ones that hike the rates. So they knowingly generated this huge trillion-dollar paper loss in their own portfolio. They were the ones doing the QE. Yes.

And then they were the ones hiking rates. And they could bail themselves out when they wanted to. So they were okay with that risk. But like everyone else, I doubt that the Fed six months ago, a year ago, thought they were going to go to 5%, right? And I don't know that the Fed even really thought of the plumbing of its balance sheet. But the Fed has the biggest duration mismatch of any bank. has the biggest duration mismatch of any bank. And I think it could become, I'm not predicting this, but it could become a political issue in terms of the Fed seeing its independence erode

over time. When you're living in a world where debt to GDP is 120% and rising, you need low interest rates. And when we had high debt in the 1940s, the U.S. grew out of it through the economic boom that followed the war. We don't have that today. If Congress said to the Fed, lower rates because we can't fund the shit we want to vote for at the current rate of interest,

the Fed would be like, wait, no? That's not in our mandate to help you buy more helicopters? That's not what we're doing. at the current rate of interest, the Fed would be like, wait, no? Right. That's not in our mandate to help you buy more helicopters. That's not what we're doing. But that happened in the 1940s in the buildup of World War II. But the Fed was not independent yet, right? That happened in 1951. But this is exactly what happened from 1942 to 1946. So FDR said, here's the deal.

We need money. Don't worry about it. Don't worry about inflation. At that point, the Fed was under the pur here's the deal. We need money. Don't worry about it. Don't worry about inflation. At that point, the Fed was under the purview of the Treasury, and the Treasury tripled its debt to GDP from 40% to 120% because of World War II. For good reason, right. And the Fed was tasked with monetizing that debt. It kept short rates at 1%. It increased its balance sheet tenfold, tenfold.

But it worked. Now they inflated the debt a while. It worked, and they capped bond yields at 2 and a half and they eventually got out of it. They did yield curve control, which I think is a very plausible outcome in the next couple of years. And then the 50s and early 60s, there was no inflation. There was an economic boom, but demographically, economically was totally different. But so I could see... Conceivably, we could have a political showdown. I could see Congress trying to solve for the same outcome. And I think the Fed obviously is very protective

of its hard-fought credibility on inflation. And so back to this notion of, well, the Fed- We do have wars to fight. We do have wars to fight. I mean, potentially. Yeah. And so what I think might be an in-between outcome is that the Fed will stay hawkish on rates because it needs to slay the inflation dragon.

But it will provide all the liquidity that the banks need, and they won't call it QE. They will be collateralized loans at 5% rather than open-ended asset purchases. And I think that's a fair argument to make. So you'll see QT and high rates and liquidity programs at the same time and maybe yield curve control on top of that to try to keep – Yield curve control is like what the Japanese try to do. Can you give our listeners like a quick explanation of what that would mean? It means changing the composition of your portfolio so that you have more – you're buying more long-term debt than short-term debt. And that way, the Fed could keep short rates high to get inflation down while keeping long

rates relatively low so that the banks don't have these capital issues. Yuri, and there aren't many single variables that predict a stock market's forward returns. But one of the powerful ones is inflation. Is it higher or lower than it was a year ago? When it's lower, returns are, I'm making this up, but it's directionally right, 11% a year historically. And when it's higher, it drops to like 4%, like massive difference. So I'll ask you, and maybe I sound like a dead horse, beating a dead horse for the listener when I keep talking about what is the market seeing. In your experience, when everyone is expecting the

market to do one thing and the market's doing something else, is everyone right and the market is wrong? Or is it generally that the market is right and we're all missing something? Neither or both. And I hate to give such a terrible answer. But the herd can be correct. I mean, most of the time the market's trending. And at the tail ends, whether it's the left or the right tail, when investors get kind of over-positioned in one side or the other and the narrative is well-known and well-subscribed to, that's when you run the risk of reversals.

And those reversals might happen anyway because of changing fundamentals, like inflation, for instance. But if you have a very crowded market in one direction or the other, that reversal will kind of get amped up. So, um, you know, it's important not to be, to not be a contrarian just for contrarian isms. You don't get contrarian for 10 years. No, you need to, you need to see the divergences at the tails. You need to see the sentiment extremes, and then you need to solve for a change in the fundamental narrative. And when you get those three things, then you need to solve for a change in the fundamental narrative

And when you get those three things then you have a reversal, but it's it's a tough game So what's the spell on one side with respect to the dragon though? Because I mentioned the inflation being a big driving force. Where do you think we are? Do you think that peak inflation is behind us? Do you see a risk of reacceleration? Where do you think we're gonna be at your end? Like where are you on that? So the CPI peaked on a rate of change basis at 9% last June. It's around 5%, 6%, depending on whether you use the PCE or the CPI. And the PCE is about to get reported, I think, tomorrow.

So clearly, the rate of change is coming down, as you would expect, because of base effects and things like that. Just like earnings growth, you have base effects. I think we don't. So I think it will come down. It's proven to be a little stickier in the last month or two than I think the Fed would have hoped, which is why Powell changed the narrative or kind of amplified the narrative when he was in front of Congress. It was two days before Silicon Valley Bank, of course. I think inflation will come down to

three and a half, four. And that's, of course, above the Fed's target of two. The 2% target is on the PCE. CPI tends to run about half a point above that. So two and a half is kind of the Fed's target, if you will. I think the real risk is that inflation comes down in the next recession, whenever that happens. But it doesn't come down enough. And then you get the subsequent expansion and it comes up again. And then you get that slippery slope of the CPI or the PCE making higher highs and higher lows, which is what happened in the second half of the 60s. You know, inflation went from two to four, but then only down to two. And then if that's the launching pad to the next increase, you're making higher highs on the index, right?

And I think that is the real risk. Not that inflation won't come down, but that it won't come down far enough before it then reverses up again. I'm so glad you said that. This is the biggest fundamental misunderstanding when you talk to non-economists or people that don't really have a vested interest in understanding this stuff. You talk about inflation, you're talking about rate of change, whether it's year over year or month over month. So we're saying 6%, 2%, 5%. When you talk to a regular person on the street, they're not thinking in rate of change, they're thinking in price. And you say to them, actually, inflation is cooling off. And they'll say, yeah, but this BMW lease I just looked at is 1100.

cooling off and they'll say, yeah, but this BMW lease I just looked at is $1,100. And a year ago, it was $1,000. And they'll go through these machinations where they think it has to go back to $1,000 in order to prove that inflation stopped. No, that would be a lower price. What it actually has to do is stop going up by 10% year over year. That is slower inflation. I think most of Congress probably doesn't even understand this difference. And I understand why they don't understand it because everybody thinks in terms of like the prices they pay in their real life. Prices don't go down. If you went to Peter Luger's in 1985 for a stake, you will never, ever, no matter what inflation does, pay that same price again. The question is, how much a year does the price of that steak go up?

People struggle with this. By the way, best steak sauce on the planet. Yes. Peter Luger's. Oh, God. Not even close. Oh, I'm with you. I'm with you.

I don't think anyone would want to come on here and argue that. Can we do the speculator positions chart that you had? John, are you ready with this? What are we saying here, Urien? Oh, that's on the two-year. Yeah, so obviously we had a huge reversal in the two-year yield. It's incredible to me. From over five down to three and a half in a matter of a couple of days.

It's the biggest reversal, I think, since the early 80s. And the COT data are a few weeks old because I think their data got hacked or something like that, the CFTC. few weeks old because I think their data got hacked or something like that, their CFTC. But you see a record short position by what we call large speculators. This is Commitment of Traders Report. Commitment of Traders Report. So they're betting on higher rates. So yeah, what happened was when Chairman Powell went in front of Congress saying, you know, we're going to go like 5-7 and stay there.

That was like peak tightening narrative. Blow off top. At that point, everyone is like, oh, shit. OK. Sex. We started saying sex. Higher for longer. Yeah.

Yeah. I was talking about sex. We all were for like a week. At that point, everyone just- No, wait. Credit to us. I was talking to you about a blow off top in yields. Yeah, you were.

Did I laugh at you or did I agree with you? I don't remember. I don't either. Okay. And so a day later, SIVB blows up, and all of a sudden it's like, okay, we're at a breaking point where the Fed cycle has broken something. Because we always know the Fed goes until something somewhere breaks, and it's driven – To their credit, they kept going, though. And it's driven by a duration mismatch, right?

And so we're at that point. Have you ever seen anything like what we saw last week where the Fed raised a quarter of a point and the two-year fell anyway? You have seen that? I can imagine the 10-year falling, but the two-year? I've seen it in the last few months. But, I mean, the two-year is a really good proxy for what the rate cycle is expected to do over the next two years, obviously. And the further the Fed goes, the more pain it is expected to inflict on the banking system. And therefore, the quicker we will get to a reversal of the policy.

But I think the market is a little bit too optimistic on that because I think the Fed really needs to show that it's serious about inflation. Well, I think the market might be getting religion because the two-year fell to 3.54 last week. It's now back up to 4.1. So maybe the market's like, okay, maybe they're actually – New range. What's the – let's put this yield curve chart up, John. What's the salient point from looking at 10-year versus three-month and 10-year versus two-year? Which one do you focus more on?

And is this broken given all of the things that we've seen happen for the first time in the last three years? Well, we always like to say this time is different, but it turns out it rarely is. The two to 10 is kind of a leading indicator of the three months to 10, just because the-year will anticipate what the Fed is going to do and the 3-month hugs whatever the Fed is doing correctly. So right now they're saying the same thing, the most inverted in 40 years. And what an inverted yield curve tells you is that short rates are unsustainable at their current level and that historically it's inflicted some level of pain in the financial system because of the asset liability mismatch. And in this case, we were kind of waiting, wondering what that would be. And of course, now we know what it is. And

I think it doesn't look like it's really a systemic issue because SIVB really was a very a systemic issue because SIVB really was a very peculiar outlier. And I think the Fed has the tools to deal with it. The Fed can raise rates while providing liquidity, just like the Bank of England did last October. You think they'll get away with that? I'm skeptical. I think the Fed, if I was at the Fed, I would pause for a while. I mean, rates are pretty high and inflation is coming down on a rate of change basis. But I think really what matters for the Fed's policy is not do they go to five or four and three quarters or five and a quarter. It's how long are they going to stay above neutral after that. Julian, they have a new tool in their arsenal now, though. Now they're telling us that the banks that they broke will slow lending, which will do some

of the work for them, hence less need of interest rate hikes. So maybe they do need to break a few banks the next time they're fighting inflation. I think they're probably correct in that. But the problem is, you know, when you hike so fast, so obviously, and I hate to, you know, it's easy for me to say in hindsight, but obviously, the Fed waited too long to normalize policy after COVID, right? We had this huge double-barreled one-two punch of fiscal and monetary. I think probably everyone underestimated just how stimulative that would be. And part of the inflation problem, I think, comes from that, not all of it. And so in retrospect, the Fed probably should have gotten back closer to neutral earlier,

but it didn't. And as a result, it had to slam on the brakes, go very, very fast. And the risk is that when you're dealing with lagging indicators, inflation, employment, and you go really fast, you don't really know when you're breaking something because you're going so fast. But don't they know that? You know, the Fed had – You would think they know it. But they have to. But they have to make – there's no good option. I know.

I think in the Fed's eyes, they would defend their slow response in two ways. One is because the Fed was – inflation was under the Fed's target for so long. They said, we're not going to said, we're not going to really tighten until we see the whites in inflation's eyes, right? And as soon as the whites appeared, it was too late. And the other one was that they have a policy of, after the taper tantrum in 2013, of not surprising the markets with rate hikes

while they're doing quantitative easing. So they have to end quantitative easing first and then do the rate hike. So they had to message to the market that they were going to end QE and only then start raising rates. And by the time that was done, it was already a year ago, only a year ago,

and it was too late, basically. So this is what the Fed's predicament is. John, let's go to Yuriyan's chart of Fed assets. And this is BTFP is the new policy that – Bank Term Funding Program. Oh, I thought it was buy the effing paper. Okay. Bank Term Funding Program.

So this is like – That's the Fed's memo to itself. Right. So this is the thing that they're going to do so that they can rescue banks and hike rates at the same time or keep rates high at the same time. And it's exactly what the Bank of England did last fall when the Liz Truss administration tried to do a lot of fast and loose fiscal policy, very stimulative. Not popular.

The gilt market had a tantrum. And the BOE said, we're going to temporarily buy long-dated gilts. And everyone said, ah, they're back to QE. See, I told you. And the BOE bought these gilts for a number of weeks, and then they stopped, and they continued with rate hikes. They did one just a week or so ago, and they continued with QT. And so my sense is if I was at the Fed, I would use that as a model saying,

yes, we can have our cake and eat it too. We can tighten policy, rein in inflation inflation while at the same time providing this liquidity lifeline. Well, we'll see if the ECB wants to do that when Deutsche Bank needs capital. We'll see if they want to do this, keep raising rates and saving banks. But I think to this chart, to the point of this chart, is what we're seeing now with the banking system is that maybe QT will just need to end sooner than we all thought because even though the Fed's balance sheet is still at $8.3 trillion with trillions of excess reserves, some banks are starting to get less reserves. The smaller

banks are. So maybe what this shows us is that the Fed's balance sheet is always good. Is the biggest risk for this year is liquidity suddenly being drained from the system? And is that what this is an answer to? I think the main risk for the markets is that all of a sudden we're in a recession, which is what the yield curve showed all along, but we just didn't put the pieces of the puzzle together. And then the Fed will ease policy because, you know, nothing kills inflation like a recession. But at that point, everyone's behind the eight ball and the thing is starting to unravel. But I think what the liquidity side shows, the Fed has the tools.

It has the swap lines. It has these programs. It did the same thing in late 2008 with the TALF, the TALF. But I think the Fed's balance sheet is going to remain very large because at some point, the banking system just requires those reserves. And of course, the Fed can't sell the securities because they'll incur a loss when they do. OK. Let's put up this Gina Martin- Martin Adams tweet. This is financial conditions. She's saying, after easing up earlier this year, the Bloomberg Financial Conditions Index, excluding stock prices, is nearly one standard deviation tight. Once again, akin to the lows from the 2015-2016 correction. Is this worth paying a ton of attention to in general financial conditions?

Yes, I think so. And this looks like it's the Bloomberg one. Yes. The Goldman Sachs is one that includes equities, and actually equities are the main kind of independent variable. And I've retrofitted it, created a weekly version of it going back to the 1920s. And it's a really cool indicator to use because it shows you the market's reaction function, right? So it's stocks, short rates, long rates, credit spreads in the dollar. Those

are the five components. Measuring looseness or tightness. Yes. And so the whole point last year for what the Fed did was to tighten financial conditions. So the Fed will say, yeah, we tried to do that because that's how you slow the train. But I think the risk is that it kind of gets a life onto itself. And then all of a sudden, the Fed is playing catch up and trying to ease them again. But we're definitely not there yet. But yes, I look at financial conditions a lot. You have a couple of technical charts I want to make sure we get to. Wait, last thing, Josh.

I just want to touch this before we get to the technicals. You have a chart showing U.S. monetary policy. How would you describe – I mean this is a dumb question, but I'll ask it anyway. How would you describe where the Fed is today versus where they should be? That's a good chart. The smooth blue line is our star, so the natural rate of interest, which is not a market rate. It's a theoretical rate. This is from the San Francisco Fed, which hasn't updated this series since COVID. I don't know why, but it's easy to retrofit, which I done in that little orange line.

So it's an easy regression. It's productivity, labor growth, and credit spreads. And so our star is low but rising, as you would imagine, because the economy has been pretty hot the last few years. And so what you see here, this is a real rate. What you see is that the Fed is at neutral now. So the Fed is not tight, not yet. And the market is expecting the Fed to be done at neutral, even though inflation is running at 5%, 6%.

That doesn't usually happen. Usually, when you have an inflation problem, the Fed goes way through neutral and that's how it kills inflation, kills the economy in the process. What would be tight 6% then? It would be 6%, 7%. 6%, 7%.

This is such a weird period of time that we're living through economically. If somebody told you a year ago what would happen to the housing market, it would happen basically frozen, not much activity going on. And here we are humming along. S&P 500 earnings, revenue, you have year ago what would happen to the housing market, it would happen basically frozen, not much activity going on. And here we are humming along, S&P 500, earnings, revenue, you have charts on who we'll get to, not really rolling over. Yeah.

I mean you look at the corporate sector, the consumer sector, they're not as interest rate sensitive as they have been in the past and as they are like in other countries. Many other countries have a lot of variable rate mortgages, which immediately reset when the central bank is tightening. Here, everyone has a fixed, not everyone, but many people have a fixed rate mortgage and they refied at 3% or below a couple of years ago. And they had three years to refi. COVID broke all the textbooks of economic theory. And so this is, I think, the consequence of not just low rates, but so many years in a row of like the whole low rate secular trend, it creates a certain behavior, including banks, including the Fed, not worrying about asset liability mismatch.

Again, in the aftermath of the financial crisis, stress tests, everything was solving for credit quality losses. And I don't think the banks even got stress tested for duration mismatches. Like it wasn't even on people's radar screen. The last thing anyone expected was for a need to hike rates in an emergency. Yeah. Right. And so anyway, so it's a really bizarre time.

Let's look at, this is S&P 500 equal weight index. You're looking at this, you're looking at the technicals, I guess this is S&P 500 equal weight index. You're looking at this. You're looking at the technicals. I guess this is a range. It looks like no man's land to me. But what do I know? Tell us what you're seeing in this chart and what the orange and green bars represent. So the top chart shows the S&P 500 equal weighted.

So you kind of are defanging the fangs by treating them as an equal to all the other stocks. It's like stocks as an asset class, not the index. Correct. Okay. And you can see we're right smack in the middle of the range since last year, June. The market has gone nowhere for almost a year now. Great for content, not so great for actual investing. And people tend to think of the market in binary terms, bull or bear, up or down. And my thesis has been for a while that 2023 would be a sideways year, one that would frustrate both bulls and bears alike. And we had the valuation reset. Now we're waiting to see if earnings are the other shoe to drop. And so far, they're not.

But earnings are growing at shoe to drop. And so far, they're not. But earnings are growing at minus two right now. The bottom panel shows what percentage of stocks are kind of, the Bollinger Band is a way to detrend the market. And you measure how many standard deviations you are above or below your trend line. And so this measures the number of stocks that are either above their trend line or below. You're quantifying euphoria and fear. Basically. Okay. What's the next technical chart? This looks like- It's the S&P, I think. This is the S&P 500, which is market cap weighted, obviously driven by larger companies have bigger weightings. And is this materially different? It doesn't look on the surface to be. It's the same thing.

Markets trendless. And markets do that. And it's not the end of the world. The value proposition is, if you're an investor, sometimes you're hanging on by your fingernails because the market's in a downturn. The odds of a 20% bear market is 1 in 5. It's not insignificant. But if you wait long enough, you get plus 10%, 11% on your money if you have to wait a couple decades sometimes. But that includes periods of times like 1994, 2015, where the market just does nothing. And that's OK. I like these types of years. I use them to catch up on my other hobbies.

You said with earnings flat and margins down, that means that revenues are still rising. Indeed, the chart below shows that the S&P 500 revenues per share continue to stair-step their way to new all-time highs. So this is the textbook definition of something that is not inflation adjusted. So a lot of companies are getting the benefit, the psychic benefit of our revenues are up 15% last year. How much of that is in price? Like how much of that is because you raised prices or prices are just generally higher in the economy? I think if we were to deflate by whatever that number is, the revenue growth would be less impressive.

Yes, for sure. And revenues and earnings are things that, I mean, I look at them in real terms when you look at a very long history, but generally they're not really thought of in real terms. When companies come in and we have conference calls on company earnings, like no one's talking about, well, real earnings are up 2%. They'll look at unit growth versus comps and things like that. But generally, it's a nominal thing. And what we know from history is that inflationary periods tend to see better nominal earnings

growth for obvious reasons during recessions. Like in the 70s, earnings didn't really even go down. And actually, the 73-74 bear market is super interesting. That was a 48% decline, a 55% decline in the PE. And the entire bear market happened on valuation. And while the Fed was raising rates, 73-74, then the Fed stopped raising rates, economy went into recession, earnings went down, and the market went up. So it was completely counterintuitive of how it worked. It's an extreme example, but it shows you that if we're all solving for earnings, why are earnings holding up? Sometimes the lags are really, really big.

History is filled with extreme examples. Let's do this goal. And that's the risk of looking at averages because there is no such thing as an average cycle. The average decline in a bear market is 31%, and we did pretty close to that. This doesn't feel very average. It's an average of extremes. It doesn't feel average in the moment. Let's do these gold charts.

You have gold and price inflation, and then we'll look at gold drivers after. So gold is $1, 1900, give or take. It's made record highs as JC would tell us all in every currency so far, except for the dollar. But it looks like it's about to break out. And of course it could fool everyone in reverse, but turns out gold has not been a great inflation hedge so far, but maybe it plays catch up in the rest of this year, even though inflation might have peaked in rate of change terms.

Would that be a plausible story that you could get comfortable with? So I think the gold narrative – so I've done a lot of work on this, and the three drivers of gold that I found are price inflation, CPI, monetary inflation, so the M2 growth versus its trend, money supply growth, and real rates. And real rates is by far the most powerful one. So real rates, negative, gold up. Or real rates declining and going to negative, gold way up. It's notoriously difficult to pin gold down because, like the old saying goes, there's no fever like gold fever.

So it's not always completely rational. But my sense is that on those three factors, with CPI coming down, M2 coming down, real rates going up, gold should not be doing nearly as well as it is. So my guess is it's based on the narrative of an imminent Fed pivot, maybe a loss of independence by the Fed. That would be the weak dollar trade. Yeah, the dollar's weakening. It is.

How about one of the oldest financial institutions in the world, Credit Suisse, being force-merged into a competitor at the behest of the Swiss National Bank? And people in Europe that are affected by this probably are also gold aficionados, especially the Swiss. Yo, and I love this chart because to your point about gold being this really weird thing, you have a chart showing the correlation

between several different drivers that could plausibly drive returns. None of these correlations stay for long, right? It's very unstable. You can't put it down. It's very unstable. So you're showing, okay, so you're showing the top is just gold price.

Yes. And then on the bottom, you're showing US dollar, two-year CPI, five-year money supply, real 10-year CPI, real 10-year tips, shadow-fed funds rate. None of these has explanatory power over the price of gold for longer than a couple of years. Correct. It shows the five-year rolling correlation. So anyone that tells you gold goes up or down because of blank is lying. Correct. Okay. I have always felt that. I've never seen somebody explain it this well. I'm stealing this chart. Gold goes where it goes.

Gold goes where it goes. Nobody's satisfied with that answer, by the way. I mean, look, I own gold. I think it's a good strategic asset to have. I mean, not too much because it doesn't have a yield. Although, if you look at, I don't know if we have the chart of purchasing power of a dollar since 1900, chart of purchasing power of a dollar since 1900. Oh, we sure do. It's next. John, please talk to this. Look how fast this guy is, by the way. So gold doesn't have a yield, right?

So that's Warren Buffett's argument against gold, or at least it used to be. But still, since 1900, it has outperformed cash and come very close to bonds as a store of value. And I think gold, I think, like you look at credit suites, for instance, you can see that governments have no choice but to bail out financial institutions when they get too big to fill. And SIVB is a tiny little fraction of that compared to credit suites. But it's the same kind of story.

And so, if you take that argument to its extreme, that eventually everything gets kind of nationalized or quasi-nationalized and central bank balance are just going to get ever, ever bigger. And then you debase fiat money. I'm not a conspiracy theory. I'm not one of these people that think the dollar is going to lose its reserve status. one of these people that think the dollar is going to lose its reserve status. I think that narrative is, I mean, I've heard that argument since the 1990s. So I think the dollar will be fine. But I think having some of your money in gold- Not this. I hate rules of thumb. This one just in my head feels real for me. You're a mental models guy. I think I am.

Somebody said, I don't know who said it. I'm sure a million people have said it. The way to think about the value of an ounce of gold over time is that it will always buy a fine gentleman's suit. This is not obviously analysis or math, but like in my head, $2,000 sounds about right for a fine gentleman suit.

And I think back 15- I think, no, but I think back maybe 20 years, I guess 25 years ago, let's say to the beginning of the millennium around 99, 2000, you could probably buy a nice suit for 500 bucks. Isn't that where gold was trading per ounce? Five, $600? I think so. And one way to think about it— But they said that like in Shakespeare's time.

That's what it's correlated to. You forgot the suits. No, but it's from like the— People have been saying this for like 700 years. It probably has a little bit of validity. And what you can see, the gold line, no pun intended, you can see that gold used to be just— Michael's like, what's a suit?

So in the old days, gold was money. It was currency, right? And you see that little bump, that's 1933 FDR devaluing the money supply by gold. And then of course, in the 70s, gold became an actual asset with a real price. That's when I started my bearish news. What does one ounce of Bitcoin buy you these days? Is Bitcoin the new gold? Well, that's certainly- A fine pair of vintage Michael Air Jordans

is like what the Bitcoin guys would buy. I mean, Bitcoin is an aspirational store of value. Yeah, no shit. And I've done some work on it and the way I look at Bitcoin is through the lens of a traditional 60-40 person. And so, to me, Bitcoin is trying to play on the same team as gold.

And when the macro narrative is very favorable, like it was in 2020, Bitcoin is off to the races and it actually left gold in the dust. And then gold sort of started catching up. But Bitcoin is kind of, I think. You said Bitcoin has had pretty much everything thrown at it over the past year or so. I would agree with that. And it's still standing.

Respect. I agree. standing respect i agree if this crypto winter was like the dot-com bust in 2000 then bitcoin might well be the apple of 23 years ago do you want to apologize for that no no no no wait hold on but you're in i am more of a bitcoin believer than josh is even though i don't believe in anything that the bitcoin people believe in but i believe in it as an asset i i think that he believes that they believe i believe that they believe I believe in it as an asset. I think that the- He believes that they believe it. I believe that they believe it. And therefore, I believe.

I think- Hashtag thesis, hashtag process. I believe enough people believe. I think the Bitcoin maxis are not doing themselves a favor the way they talk about the- The Bitcoin maxis just tweeted back at us. They said,

Yuri and Timur believes that Bitcoin is the next Apple. So congratulations on that. Let me just – so the relationship I make with Apple is not that it's Apple, obviously. But during the dot-com boom and bust, Apple got swept up in the – yes, exactly, left-hand side. It got swept up in the mania, and of course it crashed in the aftermath of it. But if you compare the retracement Apple did on the left with what the IIX did, do you guys remember what the IIX is? It's the Interactive Internet Index.

It doesn't exist anymore. I barely remember that. But that was like the dot-com. I might have heard of it. That was the dot-com index. That's seven and XIC or IXIC? It was the IIX. IIX, okay.

But it went down like 95%. Yeah. And so Apple kind of was the separation between the Pets.coms and the real companies. And the real companies not only survived but became the companies that they are today. And so I'm just looking at the analog, and it's just an analog. today. And so I'm just looking at the analog and it's just an analog, but you know, Apple is still standing. I mean, Bitcoin is still standing after all the other shit that happened. And it's taking market share. And it's taking market share.

Market share. All right. That's where you lost me. Stop, please. All right. Can I tell you a story? Yes. Quickly. This happened. You know, the Flatiron building? Yes. Did you hear this story? I'm staying in a hotel right across the street. When are you going to finish it? I feel like it's been under scaffolding for five years.

Actually, I tweeted the photo of it out of my hotel window. That's a great hotel you're selling at. Yes. Great hotel. The addition, yes. Tell me how great this story is and how emblematic it is of the world we live in today. It had five owners, and four of them hated one of them. One of them is like this pain in the ass guy.

He like inherited it or something. And he refused to let them develop it. They wanted to renovate it. They wanted to, he wanted somebody to, he wanted a judge to allow them to separate it into five pieces. This is one building. It's a landmark, no less.

All right. So it's this ludicrous situation. And then finally there's a lawsuit, et cetera, et cetera. They agree. They're going to put it up for sale. It's going to be an auction. So the auction was last week. 11 bidders showed up, you know, with the paddles, like the whole thing, like a movie.

This is for the Flatiron building. And somebody starts bidding it up in increments of $2 million over and over and over again. I think, wait, hold on. It's 121 year old building, by the way. They'll never build anything like this. It almost could be. It almost could be. But it's Daniel Burnham built it. It's, you know, it's, it's, it's a pioneering building and it's, it's special. All right. Uh, the last time it sold was during the great depression. What? A hundred thousand dollars. That's the last time it changed hands.

Wow. Okay. So now it sold last week and the bidding starts at $50 million. There's a young guy there. Nobody's ever heard of him before. Jacob Garlick. Great name. Yeah, I would fade this guy all day.

And he had a beard. And he's bidding it up in $2 million increments. And there are real bidders there. And they're like, what the f*** is this kid doing? Anyway, bids get to $120 million. Everyone drops out. There's two people left. There's this guy, Jeff Garau, who's the majority shareholder of it currently, trying to buy the rest.

And everyone knows who he is. And then there's this kid. And they go back and forth for 40 minutes, and it gets to $190 million, and the kid wins. Wow. Okay, wait. So the kid says, yeah, I'm going to buy it.

And he had to put down $19 million deposit. So a week goes by, nobody hears from him. Oh, gosh. The kid disappeared. So I don't know how these things work. Do they let you walk in off the street? He's trying to find his keys. Maybe he thought he had the backing and then he said, hey, I won.

Give me the money now to whatever shady like, I don't know, Israeli ecstasy dealer he was in business with or fintech app. Was he dressed like Mr. Monopoly or something? Was it a publicity stunt? Dude, they don't know what it is. They can't locate him. He's a Montenegro. So here's the theory. Now here's the payback. The theory that Mr. Gural, the guy who got outbid at the last minute,

he thinks this kid was sent in to drive the price up just to mess with him because he's one of the five current owners. And remember, they've had this bitter animosity toward each other for like probably decades. So he thinks this kid was sent in just to make sure that he ends up paying through the nose, but it didn't work out

and the kid ended up winning the auction. Sounds like a good Netflix show. Anyway, So, uh, if anyone wants my retelling of this as a TV series, I am, I am, uh, available. Should we worry? We're going to end with this. Should we worry about office real estate in general or, um, like commercial real estate? That's the new buzz thing. Myself included, uh, overblown orblown or too soon to tell? I don't think it's overblown. From what I understand is that this is clearly another pain point, not directly related to the Fed, but leases are coming due, tenants are handing over the keys or they're re-upping, but one floor less than they had before.

So it's definitely happening. It's slow motion, though. It's so slow. It is slow motion because real estate is a very slow industry and it operates with lags because you have leases. But it's definitely happening and it definitely will continue to happen as leases come due and companies are just, they're not using- It's your take that it's not going to be sudden enough to act as leases come due and companies are just not using it. Is your take that it's not going to be sudden enough to act as an economic shock?

It just may act as a drag? Yes, and it affects the CMBS market. It's not so much the smaller banks. I don't think they're really that involved. CMBS market is not that big. It's like $100 billion. There will be losses, but if you look at the REIT market, it's already priced in. So everyone sees it coming. It's like a train wreck that you see coming. So it's not a surprise. And I think it's already priced into the commercial real estate market. And these are pockets that

you're avoiding. Long guess I'll agree. I have to delete all my tweets about the next shooter drop. No, I'm bearish on this, but I do see how this could go on forever. One of the key arguments— But can you say bearish but priced in? Everyone's bearish. Bearish but priced in. But one of the key arguments is, like, if you're a guy that owns commercial real estate or you're a corporation, there are a lot of steps before anybody could foreclose you out of it. Like, you could fight forever to keep something.

And so a lot of these things don't end up as catastrophic losses. They end up as workouts. And that process is glacial. So, okay. Hey, did you have fun today? It was a good show? Yeah, it was great. Thank you for having me.

It was a delayed reaction. You're not sure? We have so much fun talking to you because these are all topics that we, like, debate internally. But you, like, have done the work and have your own charts. And we just, we love this so much fun talking to you because these are all topics that we like debate internally. But you like have done the work and have your own charts. And we just we love this so much. Well, it's always a pleasure to be here. And you guys are my favorite.

So look at that. Turn that into a TikTok or whatever we do. We're going to do favorites and then we're going to let you go to dinner. Michael, do you want to start this? I do. I do. So we were talking about Laurel Canyon and the cold open, and there's a new show that I binged. I haven't binge watched a show in a long time. It's called Daisy Jones and the Six. And here's the bio on Google. In 1977, Daisy Jones and the Six were on top of

the world. The band had risen from obscurity to fame. And then after a sold out show at Chicago Soldier Field, they called it quits. Now, decades later, the band members agreed to reveal the truth. So I love the format of the show.

I love the format of the show where each member of the band is being interviewed in real time and then it takes you back to what happened

and there's, of course, a reveal and, you know, I just thought it was great. And I'm not like a gigantic music head but it was just really well done. All right.

I'll check it out. It's very much almost famous. Yeah. Yeah. Okay. That's a great movie. I want to play one of my favorites. I want to play something for you guys.

What do you think separates great from very good in poker? What are the attributes that allow someone to get great? I know this voice. There's a lot of players who are a lot better than I am. Now you've got computer training. There's a lot of players who are a lot better than I am. Now you've got computer training. There's all this game theory and studying hand combinations and stuff like that. Many of the top pros are technically way better players than I am. So you have to recognize where your strength is and what you're doing at the table and how they're going to perceive you. And when I play

against top pros, they generally perceive me probably to be pretty weak. My advantage is that I care less. This for me is a hobby. For them, it's their livelihood. So I can be relaxed and I'm going to make my best decision. And if it doesn't work, it doesn't work. And then I'll be done with my vacation and I'll go back to my day job. So that's fine. For them, like in the main event of the World Series, that's their validation. If I do well in that event and I'm a pro, this proves that I'm a great pro or it proves me versus my peers. So they have a lot of pressure. They have a lot of pressure on them. And you can take advantage of that in a poker game. If you can feel the pressure that the other person is under, because then they're going to make inferior decisions.

You know who that is? I don't. But it's another way of saying if you don't become the victim of your own ego mind, you're going to win. It's David Einhorn. Oh, wow. So that's my favorite for this week. Tell me you wouldn't listen to like another hour and a half of that. Yeah, it was not long enough.

Dude, not long enough. like another hour and a half of that. Yeah, it was not long enough. Dude, not long enough. That's David Einhorn did Patrick O'Shaughnessy's excellent podcast called Invest Like the Best. And Patrick basically asked him every, like they talk about the reinsurance business. Turns out it's not great.

There's always a loss that you never thought of that pops up. They talk about what it's been like to underperform the market for the length of time that he has and then have the comeback. It's just so – highly, highly recommend. I love that poker analogy for our listeners.

There are people who literally are making decisions because they have to beat the market this quarter, this year, this three-year period. If you're not one of them, that can be an edge for you. Just the idea that you're not a pro. You don't feel that same pressure that other people in the market are. I really love that mentality. And I think most of our listeners could probably benefit from reframing the way they think. Are you in the market to prove anything? Not really.

That's not your job. What are you worried about? And that should take the pressure off and help you make better decisions. What do you think about that? I am a firm believer in trying to not get triggered by the ego mind. And I think that's kind of what he's saying, right? And as the Buddha says, most world suffering comes from unmet expectations. And if you don't have high expectations, you're not going to get disappointed.

So I like that detachment that he has. Good for him. I also want to just point out my favorite thing from last week was we did a podcast last week with Jill Schlesinger, which was incredible. One of the best shows we've ever done. And the feedback was amazing. Your favorite was us? Yeah. I love that.

Very good. Very nice. All right. Urien, have you brought us a favorite? done and the feedback was was amazing your favorite was us yeah i love that very good very nice all right uh urian have you brought us a favorite um can i talk about my my my fanboy experience with wayne coin i would like you to so um flaming lips flaming lips one of my all-time favorite bands their shows are just incredible over the top i love this guy um and um how much how excited are you right now? Yeah, no, I love Flamin' Whips. I saw them at Raleigh years ago. So in 2013, 10 years ago,

I was going through some soul-searching in my life, and the album The Terror came out, which is a super dark, dark, moody album. And it just so resonated with me, and I couldn't really figure out why, but I just listened to it over and over. And then years later, I read an interview of him in Rolling Stone magazine, where he described that at that time, he's exactly my age, he was going through a life event, let's put it that way. And that this was kind of his requiem

for that life event. And I'm like, holy shit, like, that's why it that way, and that this was kind of his requiem for that life event. And I'm like, holy shit. Like, that's why it resonated, because we were going through the same thing at the same time. What, menopause? I don't, like, what would be with him? He got a divorce after a very long relationship. Okay, I see. All right.

And I always, like, someday I'd love to just tell him how meaningful that album was, because that album let me, like, really lean really lean into my journey like in a good way but you know um and so i was i spent time in santa barbara i have since covid and uh they played in santa barbara of all places like sleepy little at the arlington theater amazing theater and so i'm riding my bike i'm an avid cyclist and i'm i'm stopped at a light and i look to my right and i'm like, holy shit, it's Wayne Coyne. He's got a black hoodie. He's trying to be in disguise, but he's got this mane of great gray curls. So he's very easy to spot. And so I go over him and it's like, Wayne,

you know, like, and I talked to him and we talked for like 45 minutes, had a great conversation, told me his whole story. I told him my story and then, you know, I'm like, okay, well, thank you. I'll see you at the show tonight. And I rode off. And I'm like, this guy must think I'm this fucking crazy person because it was cold. I'm in head to toe cycling kit, dark side of the moon cycling kit. So like long sleeve, black with the prism and the rainbow. Yeah, but he would like that aesthetic.

That would be interesting to him. But this guy comes over in his bike in this outfit and starts talking his ear off. But that made my day because I got to share this with him. So that night we're at the show, and he's playing, and I told him what my favorite song is, which is Feeling Myself Disintegrate, which is a beautiful song.

And so during the show, he's on stage. He's about to play that song, and he starts recounting my whole art encounter no and he's like talking for a few minutes and like you know this were you crying i was like i was in disbelief and so he finds he's jumping up and down and i've got a helmet glasses like you can't see me, obviously. And at the end, he says, Mr. Bicycle Guy, it was f***ing great talking to you. Oh, my God. And I'm like, that just made my year.

Oh, my God. Is that on YouTube? Like, did anyone, like, capture it? My partner took a video of it, and it's— Incredible. So that was super fun. I have a similar story with Lou Reed. I saw him getting out of a taxi cab in Sutton Place.

Like, why would he be in the East 50s? But I wasn't 100% sure it was him. So he got out of a yellow cab, and I was just walking down the street. And I'm like, are you Lou Reed? And he said, f*** you, and walked the other way. Stop. That was the most Lou Reed thing that he could have done. And I was really, really excited about that.

I have a similar story. I think I LOL'd on the spot. I walked into a bathroom in the service building. I saw Chris Russo. And I said, holy shit, Chris Russo. And he looked at me like, weirdo, get the fuck away from me. We're in the bathroom. Wayne Coyne.

So the song that everyone knows of Flaming Lips, probably, what would you say? Do You Realize. Do You Realize. Oh, that's that? The lyrics just... Do You Realize. Don't listen to that song if you're like in a vulnerable place

because it's a beautiful song, but let me just give people... And all their songs are about impermanence, basically. Well, Do You Realize that everyone you know someday will die? Oh, God. You realize the sun doesn't go down. It's just an illusion caused by the world spinning around. It's like there's a lot. It's profound, but like on the surface, you're not supposed to see that at first.

So that was the Yashimi tour. The pink robots. So they played the whole album. tour. The Pink Robots. So they played the whole album. But they have a great time on stage. So it's about impermanence. Enjoy it while you can. And so I highly recommend it. They're playing at the King's Theater in Brooklyn on June 8th.

And I have tickets already. Hey, they did one embarrassing thing, but it was early in their career. So I don't hold it against them. They played the Peach Pit on 90210 they did and there's a and there's a really funny scene where steve walks into the diner and they're like playing one of their like indie songs and that show is the opposite of anything indie and steve goes hey is that the flaming lips and it's the most preposterous maybe moment on that show um i'm sure they would do that moment differently if they could and not say yes to that one.

But other than that, they've been cool for a long time. All right, we're going to let you go. And I just want to say on behalf of all of us at The Compound and all our listeners, you make us smarter. We so much appreciate you being here. Thank you so much. Will you come back? Yes, absolutely.

Will you come back next week? Anytime. Thanks, Aaron. Thank you, gentlemen. Thank you so much. Will you come back? Yes, absolutely. Will you come back next week? Anytime. Thanks, Aaron. Thank you, gentlemen. Thank you so much. Hey, guys, make sure you like and subscribe. Make sure you tell your friends about the pod. Leave a review.

It goes a long way. We will see you next week. Outro Music