September 26, 2024 • 19 mins
You can tell a lot about the market by analyzing what sectors and stocks are leading...and what sectors and stocks are lagging. So, what message are the markets sending out NOW? What should investors consider buying...or selling...as we head into the fourth quarter of 2024? To get the answers to those questions, I invited Michael Gayed, editor of the Lead-Lag Report and host of the Lead-Lag Live Podcast, to join me for this week’s MoneyShow MoneyMasters Podcast segment.
We begin by discussing the August selloff, the September rebound, and what the wild action says about markets moving forward. Michael lays out a skeptical case. He notes that smaller capitalization stocks are still lagging their bigger cap brethren, while sectors like utilities and asset classes like gold are leading the advance. That’s typically “defensive” action, indicating it’s premature to sound an all clear for stocks. He goes on to explain why investing is “always about probabilities” – and why it’s so important to pay attention to “disconnects and divergences” when deciding where and whether to commit your capital.
Next, Michael explains which credit market indicator he’s closely watching for signs of renewed trouble. He also names the one currency market trend that could lead to future selling in markets – one that we just got a “preview” of in early August. As the conversation nears an end, we cover topics like China stimulus and what contrarian trades it could fuel...why he has liked gold for almost a year, and still does...and what more speculative subsector of healthcare he favors. Finally, Michael previews what he’ll talk about at the 2024 MoneyShow Orlando, scheduled for Oct. 17-19 at the Omni Orlando Resort at ChampionsGate. Click here to register: https://orlandomoneyshow.com/?scode=061246
We begin by discussing the August selloff, the September rebound, and what the wild action says about markets moving forward. Michael lays out a skeptical case. He notes that smaller capitalization stocks are still lagging their bigger cap brethren, while sectors like utilities and asset classes like gold are leading the advance. That’s typically “defensive” action, indicating it’s premature to sound an all clear for stocks. He goes on to explain why investing is “always about probabilities” – and why it’s so important to pay attention to “disconnects and divergences” when deciding where and whether to commit your capital.
Next, Michael explains which credit market indicator he’s closely watching for signs of renewed trouble. He also names the one currency market trend that could lead to future selling in markets – one that we just got a “preview” of in early August. As the conversation nears an end, we cover topics like China stimulus and what contrarian trades it could fuel...why he has liked gold for almost a year, and still does...and what more speculative subsector of healthcare he favors. Finally, Michael previews what he’ll talk about at the 2024 MoneyShow Orlando, scheduled for Oct. 17-19 at the Omni Orlando Resort at ChampionsGate. Click here to register: https://orlandomoneyshow.com/?scode=061246
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
You tell a lot about the markets by what's leading
and what's lag, by which stocks and asset classes are rising,
which stocks and asset classes are falling. So what messages
are markets sending out now and how should investors position
themselves as we head into the final quarter of twenty
twenty four. I'm Mike Larson, host of The Money Show,
money Master's Podcast. Today, I'm sitting now with Michael guy Ed,
(00:25):
editor of The Lead Lag Report and host of the
Lead Lag Live podcast. I'm going to get those answers
for you. Mike, Welcome to the show.
Speaker 2 (00:33):
I hope I can find somebody else who has the answers.
And it's like, I want to do the quota front
thing from what was the weakest link I think it
was right.
Speaker 1 (00:39):
Oh, there you go. That's a great that's a great
crazy machine memory there. Well, anyways, let's start just by
a big picture. I mean, you know a lot of
people I know follow your work on Twitter and x
and what you do with the podcast. But if somebody
doesn't know a little bit about your background, wy don't
you just tell me you know why you have this
lead lag approach to markets and why you think it's
so critical.
Speaker 2 (01:00):
There's nothing that's ever guaranteed in markets. But the closest
thing to guaranteed, which again is a loaded word from
a compliance perspective, is meaner version.
Speaker 1 (01:13):
Right.
Speaker 2 (01:13):
It's like I always go back to meaner version as
a concept that's as old as the Bible. Right, he
who is first shall be last, and lasts first. He
who leads a lag and he who lags will lead. Right,
that kind of thing. So there's always gonna be these,
you know, ever evolving dynamics where there's new leadership, leaders
become laggers and so on and so forth, And a
lot of the work I try to do is try
to identify from a sector perspective, asset class perspective, the
(01:35):
conditions where you're going to have a shift in what's leading,
what's lagging. Sometimes I'm right, sometimes I'm wrong. One thing
I certainly am is loud about my views.
Speaker 1 (01:45):
Why not?
Speaker 2 (01:46):
Right, Yeah, I mean you kind of need to be.
I mean, the look nobody. I always go back to
this point that no amount of intelligence can increase the
clarity of one's crystal ball. Right, I don't care how
smart you are, I don't care what your net worth is.
Nobody knows what tomorrow brings right. It's why I try
to frame things in terms of conditions that favor something happening.
And it's the thing right I find and I'm sure
(02:07):
you see this too. A lot of people know intuitively
that when it comes to investing, when it comes to
day to day activities, it's always about probabilities. The thing is,
probabilities in our business often just come with a single
rule of the die, which means, even if the probabilities
of something happening are high, it may not end up happening, right,
(02:29):
because there's still a low. Probably something doesn't happen only
at one shot, right, as far as far as how
that analysis ends up playing out. But yeah, certainly, I
think I hope at least I bring a certain degree
of consistency in a way that I think about things,
whether it's right or wrong. And to the extent that
I've been wrong about the AI trade but also right
(02:50):
about gold. The reality is that's how this business works.
You're right on things, you're wrong on things. The key
thing is are you able to identify the probability and
the conditions first?
Speaker 1 (03:01):
Got it? Let's talk about this mark environment. I mean,
you know, as we're talking we've had something like what
forty records to the S and P five hundred you
got Wall Street strategists or throwing out six thousand, six
thousand plus targets kind of left and right. You know,
optimism abounds. What's wrong with that picture? Or is there
something wrong with that picture in your opinion?
Speaker 2 (03:18):
Well, and credible to you, Mike, because you've you know,
you've been on Lead Lag Live and you've gotten that right. Also,
you've you've been bullish throughout this right, I mean, I've
been much more skeptical. Although skepticism doesn't mean shorting, right,
I mean, skeptical just means I see disconnects and divergences. Yeah,
It's like if at the start of the year I
would have say to somebody listening that at this point
(03:39):
in twenty twenty four two of the best performing areas
would be gold and the utility sector. You probably would
not think the S and P five hundred is up
as much as it is at this point in the
year because those are traditionally more defensive assets right at sectors, right,
But that's exactly what's happened this year. So I don't
know if it's a question of is something in quote wrong.
(03:59):
I was just talking to the other day about this.
I feel like I've been a bit of a broken record, right,
because nothing really has changed from my vantage point. From
my standpoint, I still view the very real disconnects around
large caps and small caps as being troublesome. Meaning sure,
forty I think was the number you said on the
S and P five hundred new highs this year, but
(04:20):
small caps have not made new highs, right, I mean
relative to twenty twenty one, they're still below that level.
I would argue that small caps are more reflection of
the US economy than multinational large caps, which makes me
also suspect in terms of the true strength of the economy,
the true strength of employment in general, because most hiring
happens from the small cap side of things, they've been
(04:41):
held back by higher for longer rates. Even with this
fed cut of fifty basis points, it doesn't seem to
be conting that much excitement, at least so far around
the small cap in when that's the most sensitive part
of the marketplace. All while again defensiveness seems to keep
on leading. Gold has been on fire. Right, So it
goes back to I said before, I've been wrong about
(05:01):
large cap momentum persisting driven by the AI trade for
as long as it has. But clearly there's still plenty
of opportunities even if you're in quotes bearish equities by
just not being in equities.
Speaker 1 (05:13):
Well, let's talk about that message. You know you noted again,
you do great work on substack. I love following what
you have to say there. You talk about treasury yearlds
falling in a recent piece, gold rising utilities. Yeah, as
you point out, that tends to be a sort of
defensive type environment. So why why do you think equities
are holding out? What do you think is going on there?
Or what's the message you suss out from all of this.
Speaker 2 (05:34):
So it's not gonna be a very accurate or maybe
not accurate, and it's not gonna be a very popular
way of saying it. But I think the reality is
still in a very unusual environment and that nothing is
sinking the way you would normally think it should, which
I know sounds like it's a cop out answer, but
I keep going back to think about what we've gone
through the last three and a half four years, shut
(05:56):
down with COVID, reopening with COVID fastest rate hikes, psycho history,
all the stimmy checks. Each of these are monumental, and
each of them have their own lagged effects on the economy.
So to some extense, it kind of makes sense that
nothing looks like it's making sense when you look at
what usually is co movement across certain parts of the
marketplace giving the same kind of message. Normally you would see,
(06:19):
for example, that when credit spreads are tight differential between
junk debt and high quality paper, small caps would do well.
Small caps are the junk debt equivalent of the equity space,
junk debt is the small cap equivalent of the bond space, right,
just from a leverage perspective, And yet they've given two
very different messages as far as the fault risk. Again,
(06:39):
maybe you can say that that's to be expected given
the laged effects, and everything is still being so unusual
post COVID. The good news is that every day goes by,
you're closer to hopefully a recinc recent meaning you have
consistency of different asset classes and sectors telling you the
same thing as opposed to what is very clear different messaging.
How that messaging re issues anybody's guests, I mean, I
(07:01):
tend to be more on the negative side because I
believe that you can't have an environment that's just dominated
by one story that doesn't permeate through all parts of
the marketplace. Again, if AI is real, then small caps
should be beneficiaries, but they haven't been. Right, it's about
If AI is about productivity, then you would think that
(07:23):
there's gonna be a big boom that's coming for small
caps as they use these tools. Hasn't happened fair enough?
Speaker 1 (07:29):
Fair enough? A question for you on the FED here.
I mean, you know, obviously every I would say everybody surprised.
I mean I was kind of looking for a fifty,
so I didn't. It didn't really shock me. And you
know maybe what one third or so two thirds of
people were looking for that. Why do you think the
FED went fifty? And you know what, do you think
the message is there going forward when it comes to
rates and the Fed?
Speaker 2 (07:50):
It's a instant question, right, because it's not like the
market was betting on fifty basis points being becoming a
higher probably as we were getting closer. Yeah, it wasn't
like it was always baked in right From the same point,
it's a good question. So personally, I believe that it's
more a sign of some degree in quotes panic, right,
So I put that post out and it went viral.
(08:11):
It's not a bullish thing, it's a panic thing. The issue,
I think, from the way I see it, is why
do they feel compelled to start off that aggressively when
history shows that when they start off that aggressively, it's
actually not a good thing going forward. Now, again, you know,
the market is taken in a positive way, at least
for now, And I will remind people that more often
(08:36):
than not, three months after the start of the FED
cutting cycle, three months afterwards, markets on average tend to
be lower, not always going back to the seventies, so
we could still see stocks go down, you know, meaningfully.
As far as the FED and it's reasoning, my only
guess would be that they are probably legitially worried about
the unemployment ry that that becomes more the focal point
(09:00):
point of their attention, especially in an election year, as
opposed to inflation or there's a dual mandate, but they
can choose to favor one over the other. I think
the unemployment rate is probably the bigger thing.
Speaker 1 (09:10):
Now. Another big topic that's out there is kind of
China stimulus. You know, obviously that market's just been sort
of this long slow slide. Equities, I mean, real estate,
there has been a huge mess for years. You know,
what do you think turns that around? If anything? Do
you think some of the moves they're making here are
gonna make investors look at global stocks, look at Asian markets,
(09:31):
China in particular.
Speaker 2 (09:32):
Moving forward, I think to some extent, you answered your
own question when you said, for years it was back
to menaversion, right, who was first ship the last and last?
First Leaders become laggers, Lagers become leaders. Time is often
the catalyst for that, Right, It doesn't necessarily have to
be stimulus. It can just be time happens. Look, I
mean obviously the market says, we're chatting, are excited about that.
(09:55):
When it comes to China, China, the bearishness in China
has been stunning, all right, I want's talk about s
flationary depression. Meanwhile, the China equity is even prior to
the stemy moves held the lows speak about divergences. Right,
It's like the equities have been saying one thing different
from the narrative, and what looks like a worst thing
economic situation. So here comes stimulus. We'll see if the
(10:16):
assignment continues. I think the concerns around China is that,
you know, you're starting from such an extraordinary debt leverage
perspective that's hard to see how any real stimulus is
going to be longer term impactful. Sorry for the fact
that it's clear that they don't have the same degree
of culturally consumerism that the West does, so it's unclear
(10:36):
also from that same but can you get the demand
pulse out of the consumer equation really to drive the
economy there. But it's enough, I think to at least
get some investors to take a position, and that alone
could cause some upward momentum. The reality is this has
been such an underinvested part of the marketplace because of
gew political risks, you know, the optics of it for
(11:00):
you know, the average American investor in the middle of
the country who says, why would I want to buy
China when I can buy Usa? So from that perspective, Loan,
I think it's a contrarian trade. But I think the
key word there is trade.
Speaker 1 (11:14):
Got it fair enough? Question? While we're talking about developments
in Asia, you've talked a lot about the Japanese yen
and kind of keeping an eye on what that's doing
and what you know, maybe message there is for people
who haven't been following your work, what is it you're
watching there and why is it something that you are
paying attention to.
Speaker 2 (11:28):
We had that freak out right August third and August fifth,
and everyone was high five of me on this reverse
carrier trade idea. The idea that yeah, so much money
has been levered from Japan at its low rates deployed
around the world in the moment you have any kind
of sense of the en appreciating that would then cause
a repatriation of some of those yen and then cause
a sell off in global assets. So you had that
fear moment, only lasted two days, and everyone became an
(11:51):
expert on it. I don't think the dynamic is over
by a long shot, and I know that a lot
of people seem to think that it is, especially when
you look at yen CFTC futures positioning, which is now
long from flipping from being short. My hesitation thinking that
it's over is that this is a two decade type
of dynamic that's been ongoing where a lot of money
(12:12):
has legitimately come out of Japan from many small businesses,
many large businesses where they're not reporting their positions right,
so which means I suspect they're still actually on a
private side of things a lot more short quotes yen
than people realize, which still means you could still have
another squeeze higher in the end. If that happens, that
still becomes problematic from a global deleveraging perspective. I think
(12:34):
it was more a preview what we saw August third
and August fifth. Now people hearing that will say, you've
been on that drum for the last two years. It's
not true. It's I've been saying this since August of
last year. It's just something to be mindful of, right
and for all we know, that could be why gold
is doing what it's doing. That could be why utilities
are doing what they're doing, because there's still kind of
a lingering concern that there is that tail event that
(12:56):
Japan could still spark.
Speaker 1 (12:59):
So let's talk about what you're generally bullish on and
versus what you'd still generally call yourself bearish on. Whether
it's asset class, a couple of names you want to
throw it I'll kind of leave it up to you
on that. But obviously we talked about gold, so I
assume you'd consider us. I'll still a bull there, correct.
Speaker 2 (13:14):
Yeah, I think the skepticism is still very real when
it comes to gold, so that you know, I always
go back to trends live on skepticism, they die on conviction.
So there's still a lot of skepticism ruggles. I think
gold probably does. I've been on that train since October
of last year as well. I actually do think small
caps are probably due to outperform. I mean instantly enough,
small cats versus large caps have actually held their their
(13:34):
ratio low from July. And yeah, it's meandering, it's not
having excitement, but it's basically kind of keeping aligning with
the SMP, which may be the first step to a
bottoming process. Now, the only caveaut there is small caps
can now perform by being down less. Right, So if
you're going to do a spread trade, you go long small,
short large. I think that makes sense, right, But but again,
I mean, every time it looks like that's going to happen,
(13:55):
small cats keep on weakening and weakening. I would personally
avoid tech. Now I've been wrong on that right, I
just happen to think that it's extremely one sided of
a trade. Right, it's been a phenomenal winner. I just
tend to prefer the idea that laggards become leaders and
leaders become laggards. Goes back to that point. Broadly speaking,
(14:15):
I think the I think the if you're going to
take a specutive bet, I think biotech hats to be
more and more interesting with every day that goes by
the reason I say that is, I think in terms
of factors, right, So, what's driving the biotech industry subgroup
the fact that a lot of them are smaller to
the small cap factor and the fact that there's a
(14:38):
sector component to it healthcare. Now, a lot of the
healthcare momentum has been written by these GLP one plays,
which has totally made everybody not look at anything except
the iLiads and artists is of the world things like that.
So people have ignored small caps, they've ignored everything except
you know, GLP one. That seems like a contrion trade. Also,
(15:01):
and again, if AI is real, you would think biotechs
would benefit the most. And nothing should be more apt
to the benefits of artificial intelligence than the complexity of
the human body. Right, So I think there's now the
copy of there, of course, is that you've got to
be careful with it. You know. It's obviously very you know,
syncratic in terms of the individual companies. But I think
that part makes a lot of sense from a longer
term perspective.
Speaker 1 (15:21):
Okay, I guess as we get towards the tail end
of this conversation, I mean, what is the one trigger
thing or indicator you'd watching that you're watching that maybe
signals you know what some of these concerns I having
I've been having it and speaking about are really coming
to the fore? Is it something in the credit markets?
Is a saying in equity markets, what specifically would you be
looking for? As assigned to people who follow your work, Hey,
(15:42):
this is the time to get more cautious.
Speaker 2 (15:46):
So if I've been right about anything about the diverse
carriage trade, is that it would bring back the behavior
of the flight to safety dynamics back into treasuries. So Ever,
since that happened from August fifth on, whenever the equity
market is down heavy, you end up seeing long eration
treasure yields dropping, which is very sensitive to me because
my funds are built on the very concept, right, my
(16:06):
mute fund on ets, so that that is I think
an im important change the way things once wore. Right Now,
in order for that dynamic to hold, you need to
have credit spreads widening, so difference between junk and triple A,
which is what forces the flight to safety, which has
been what's been missing throughout this. Now, if the unemployment
(16:27):
rate were to keep on rising and you do have
some kind of a recession, you would expect the credit
spread should widen because it's about to fault for us, right.
So I think it's interesting because actually leading up to
the fifty bases point cut, spreads were widening and then
they just cratered yet again. Yeah, so it was like
it's almost like the Federals trying to whack them all
that very quickly. Like they were you can argue in
October of last year when spreads were starting and widened
(16:49):
and then they came in and got the market. I
think six cuts were coming. Obviously they're looking at credit
spread its probably day to day no different than than
I am question just can they get ahead of it enough? Times?
So I think credits spreads are import and I think
the behavior of treasuries is important. The housing side of
it is going to be intriguing to see how this
plays out. Lumber has been obviously a week pretty much
all year. Home builder socks have been strong all year. Yeah,
(17:13):
there's different messages there. Goes back to divergences. Lumber is
a talent housing because of construction, but the homebuilder socks
are clearly saying there's a lot of activities still coming.
So we'll see on that end. But I think if
you're gonna rank them, i'd say, you know, credit spreads
become the number one thing to focus on.
Speaker 1 (17:30):
Mike, you're gonna be joining us for the twenty twenty
four Money Show in Orlando mid October. I'm curious, can
you give the sneak peek and made what you think
you're going to be talking about there? And you know
what somebody comes to your session is going to learn
and tack up.
Speaker 2 (17:42):
So you know I've been doing these Uh. I think
I've been like seven hundred different guests over the last
two years, right top five percent podcast downloads, and I
tend to not prepare it all. When I talk to people,
it's more just listening and you know, maybe interjecting except
my own thoughts on markets, but really just listening and
trying to two vectors off of conversation. So I think
what anyway that joins will hear is authenticity and a
(18:05):
legitimate conversation among two professionals. Hopefully I'm considered a professional
in the industry with other people that are coming from
the same place as I am. In that neither of
us will know wherever, whether it's me or the guest,
what tomorrow brings, but we'll try to provide some color
context around how we think about things. And from that perspective,
I'm excited because oftentimes, as you know, interviewing somebody in
(18:29):
person is very different than doing it via screen like this.
I think it's actually going to be a much more
natural and intriguing to have it one on one like that.
Speaker 1 (18:36):
Great. I mean absolutely one hundred percent agree with you there, Mike,
Thank you so much for insights. Viewers. If you're watching
you'd like to learn more about Mike's going to be
talking about again. He's going to be at The Money
Show Orlando. It runs October seventeenth to nineteenth at the
Omni Orlando Resort at Champions Gate and find more details
by clicking the link in the video description below. Don't
forget to like this video, follow us, subscribe on our
(18:57):
channel and you'll get more content like this. Mike good
talking to you. Can't wait to see in person again
in a few weeks.
Speaker 2 (19:02):
Yeah, I likewise, Mike, looking forward to it.
Speaker 1 (19:04):
We'll have more interviews for you every week, so I
encourage you to subscribe to The Money Master's podcast so
you can stay up to date with the insights from
top money experts. You can follow me on Twitter at
real Mike Larson and follow Money Show for more investing
and trading content on Twitter, Instagram, and YouTube at money Show.
Thanks for listening, See you next time.
You tell a lot about the markets by what's leading
and what's lag, by which stocks and asset classes are rising,
which stocks and asset classes are falling. So what messages
are markets sending out now and how should investors position
themselves as we head into the final quarter of twenty
twenty four. I'm Mike Larson, host of The Money Show,
money Master's Podcast. Today, I'm sitting now with Michael guy Ed,
(00:25):
editor of The Lead Lag Report and host of the
Lead Lag Live podcast. I'm going to get those answers
for you. Mike, Welcome to the show.
Speaker 2 (00:33):
I hope I can find somebody else who has the answers.
And it's like, I want to do the quota front
thing from what was the weakest link I think it
was right.
Speaker 1 (00:39):
Oh, there you go. That's a great that's a great
crazy machine memory there. Well, anyways, let's start just by
a big picture. I mean, you know a lot of
people I know follow your work on Twitter and x
and what you do with the podcast. But if somebody
doesn't know a little bit about your background, wy don't
you just tell me you know why you have this
lead lag approach to markets and why you think it's
so critical.
Speaker 2 (01:00):
There's nothing that's ever guaranteed in markets. But the closest
thing to guaranteed, which again is a loaded word from
a compliance perspective, is meaner version.
Speaker 1 (01:13):
Right.
Speaker 2 (01:13):
It's like I always go back to meaner version as
a concept that's as old as the Bible. Right, he
who is first shall be last, and lasts first. He
who leads a lag and he who lags will lead. Right,
that kind of thing. So there's always gonna be these,
you know, ever evolving dynamics where there's new leadership, leaders
become laggers and so on and so forth, And a
lot of the work I try to do is try
to identify from a sector perspective, asset class perspective, the
(01:35):
conditions where you're going to have a shift in what's leading,
what's lagging. Sometimes I'm right, sometimes I'm wrong. One thing
I certainly am is loud about my views.
Speaker 1 (01:45):
Why not?
Speaker 2 (01:46):
Right, Yeah, I mean you kind of need to be.
I mean, the look nobody. I always go back to
this point that no amount of intelligence can increase the
clarity of one's crystal ball. Right, I don't care how
smart you are, I don't care what your net worth is.
Nobody knows what tomorrow brings right. It's why I try
to frame things in terms of conditions that favor something happening.
And it's the thing right I find and I'm sure
(02:07):
you see this too. A lot of people know intuitively
that when it comes to investing, when it comes to
day to day activities, it's always about probabilities. The thing is,
probabilities in our business often just come with a single
rule of the die, which means, even if the probabilities
of something happening are high, it may not end up happening, right,
(02:29):
because there's still a low. Probably something doesn't happen only
at one shot, right, as far as far as how
that analysis ends up playing out. But yeah, certainly, I
think I hope at least I bring a certain degree
of consistency in a way that I think about things,
whether it's right or wrong. And to the extent that
I've been wrong about the AI trade but also right
(02:50):
about gold. The reality is that's how this business works.
You're right on things, you're wrong on things. The key
thing is are you able to identify the probability and
the conditions first?
Speaker 1 (03:01):
Got it? Let's talk about this mark environment. I mean,
you know, as we're talking we've had something like what
forty records to the S and P five hundred you
got Wall Street strategists or throwing out six thousand, six
thousand plus targets kind of left and right. You know,
optimism abounds. What's wrong with that picture? Or is there
something wrong with that picture in your opinion?
Speaker 2 (03:18):
Well, and credible to you, Mike, because you've you know,
you've been on Lead Lag Live and you've gotten that right. Also,
you've you've been bullish throughout this right, I mean, I've
been much more skeptical. Although skepticism doesn't mean shorting, right,
I mean, skeptical just means I see disconnects and divergences. Yeah,
It's like if at the start of the year I
would have say to somebody listening that at this point
(03:39):
in twenty twenty four two of the best performing areas
would be gold and the utility sector. You probably would
not think the S and P five hundred is up
as much as it is at this point in the
year because those are traditionally more defensive assets right at sectors, right,
But that's exactly what's happened this year. So I don't
know if it's a question of is something in quote wrong.
(03:59):
I was just talking to the other day about this.
I feel like I've been a bit of a broken record, right,
because nothing really has changed from my vantage point. From
my standpoint, I still view the very real disconnects around
large caps and small caps as being troublesome. Meaning sure,
forty I think was the number you said on the
S and P five hundred new highs this year, but
(04:20):
small caps have not made new highs, right, I mean
relative to twenty twenty one, they're still below that level.
I would argue that small caps are more reflection of
the US economy than multinational large caps, which makes me
also suspect in terms of the true strength of the economy,
the true strength of employment in general, because most hiring
happens from the small cap side of things, they've been
(04:41):
held back by higher for longer rates. Even with this
fed cut of fifty basis points, it doesn't seem to
be conting that much excitement, at least so far around
the small cap in when that's the most sensitive part
of the marketplace. All while again defensiveness seems to keep
on leading. Gold has been on fire. Right, So it
goes back to I said before, I've been wrong about
(05:01):
large cap momentum persisting driven by the AI trade for
as long as it has. But clearly there's still plenty
of opportunities even if you're in quotes bearish equities by
just not being in equities.
Speaker 1 (05:13):
Well, let's talk about that message. You know you noted again,
you do great work on substack. I love following what
you have to say there. You talk about treasury yearlds
falling in a recent piece, gold rising utilities. Yeah, as
you point out, that tends to be a sort of
defensive type environment. So why why do you think equities
are holding out? What do you think is going on there?
Or what's the message you suss out from all of this.
Speaker 2 (05:34):
So it's not gonna be a very accurate or maybe
not accurate, and it's not gonna be a very popular
way of saying it. But I think the reality is
still in a very unusual environment and that nothing is
sinking the way you would normally think it should, which
I know sounds like it's a cop out answer, but
I keep going back to think about what we've gone
through the last three and a half four years, shut
(05:56):
down with COVID, reopening with COVID fastest rate hikes, psycho history,
all the stimmy checks. Each of these are monumental, and
each of them have their own lagged effects on the economy.
So to some extense, it kind of makes sense that
nothing looks like it's making sense when you look at
what usually is co movement across certain parts of the
marketplace giving the same kind of message. Normally you would see,
(06:19):
for example, that when credit spreads are tight differential between
junk debt and high quality paper, small caps would do well.
Small caps are the junk debt equivalent of the equity space,
junk debt is the small cap equivalent of the bond space, right,
just from a leverage perspective, And yet they've given two
very different messages as far as the fault risk. Again,
(06:39):
maybe you can say that that's to be expected given
the laged effects, and everything is still being so unusual
post COVID. The good news is that every day goes by,
you're closer to hopefully a recinc recent meaning you have
consistency of different asset classes and sectors telling you the
same thing as opposed to what is very clear different messaging.
How that messaging re issues anybody's guests, I mean, I
(07:01):
tend to be more on the negative side because I
believe that you can't have an environment that's just dominated
by one story that doesn't permeate through all parts of
the marketplace. Again, if AI is real, then small caps
should be beneficiaries, but they haven't been. Right, it's about
If AI is about productivity, then you would think that
(07:23):
there's gonna be a big boom that's coming for small
caps as they use these tools. Hasn't happened fair enough?
Speaker 1 (07:29):
Fair enough? A question for you on the FED here.
I mean, you know, obviously every I would say everybody surprised.
I mean I was kind of looking for a fifty,
so I didn't. It didn't really shock me. And you
know maybe what one third or so two thirds of
people were looking for that. Why do you think the
FED went fifty? And you know what, do you think
the message is there going forward when it comes to
rates and the Fed?
Speaker 2 (07:50):
It's a instant question, right, because it's not like the
market was betting on fifty basis points being becoming a
higher probably as we were getting closer. Yeah, it wasn't
like it was always baked in right From the same point,
it's a good question. So personally, I believe that it's
more a sign of some degree in quotes panic, right,
So I put that post out and it went viral.
(08:11):
It's not a bullish thing, it's a panic thing. The issue,
I think, from the way I see it, is why
do they feel compelled to start off that aggressively when
history shows that when they start off that aggressively, it's
actually not a good thing going forward. Now, again, you know,
the market is taken in a positive way, at least
for now, And I will remind people that more often
(08:36):
than not, three months after the start of the FED
cutting cycle, three months afterwards, markets on average tend to
be lower, not always going back to the seventies, so
we could still see stocks go down, you know, meaningfully.
As far as the FED and it's reasoning, my only
guess would be that they are probably legitially worried about
the unemployment ry that that becomes more the focal point
(09:00):
point of their attention, especially in an election year, as
opposed to inflation or there's a dual mandate, but they
can choose to favor one over the other. I think
the unemployment rate is probably the bigger thing.
Speaker 1 (09:10):
Now. Another big topic that's out there is kind of
China stimulus. You know, obviously that market's just been sort
of this long slow slide. Equities, I mean, real estate,
there has been a huge mess for years. You know,
what do you think turns that around? If anything? Do
you think some of the moves they're making here are
gonna make investors look at global stocks, look at Asian markets,
(09:31):
China in particular.
Speaker 2 (09:32):
Moving forward, I think to some extent, you answered your
own question when you said, for years it was back
to menaversion, right, who was first ship the last and last?
First Leaders become laggers, Lagers become leaders. Time is often
the catalyst for that, Right, It doesn't necessarily have to
be stimulus. It can just be time happens. Look, I
mean obviously the market says, we're chatting, are excited about that.
(09:55):
When it comes to China, China, the bearishness in China
has been stunning, all right, I want's talk about s
flationary depression. Meanwhile, the China equity is even prior to
the stemy moves held the lows speak about divergences. Right,
It's like the equities have been saying one thing different
from the narrative, and what looks like a worst thing
economic situation. So here comes stimulus. We'll see if the
(10:16):
assignment continues. I think the concerns around China is that,
you know, you're starting from such an extraordinary debt leverage
perspective that's hard to see how any real stimulus is
going to be longer term impactful. Sorry for the fact
that it's clear that they don't have the same degree
of culturally consumerism that the West does, so it's unclear
(10:36):
also from that same but can you get the demand
pulse out of the consumer equation really to drive the
economy there. But it's enough, I think to at least
get some investors to take a position, and that alone
could cause some upward momentum. The reality is this has
been such an underinvested part of the marketplace because of
gew political risks, you know, the optics of it for
(11:00):
you know, the average American investor in the middle of
the country who says, why would I want to buy
China when I can buy Usa? So from that perspective, Loan,
I think it's a contrarian trade. But I think the
key word there is trade.
Speaker 1 (11:14):
Got it fair enough? Question? While we're talking about developments
in Asia, you've talked a lot about the Japanese yen
and kind of keeping an eye on what that's doing
and what you know, maybe message there is for people
who haven't been following your work, what is it you're
watching there and why is it something that you are
paying attention to.
Speaker 2 (11:28):
We had that freak out right August third and August fifth,
and everyone was high five of me on this reverse
carrier trade idea. The idea that yeah, so much money
has been levered from Japan at its low rates deployed
around the world in the moment you have any kind
of sense of the en appreciating that would then cause
a repatriation of some of those yen and then cause
a sell off in global assets. So you had that
fear moment, only lasted two days, and everyone became an
(11:51):
expert on it. I don't think the dynamic is over
by a long shot, and I know that a lot
of people seem to think that it is, especially when
you look at yen CFTC futures positioning, which is now
long from flipping from being short. My hesitation thinking that
it's over is that this is a two decade type
of dynamic that's been ongoing where a lot of money
(12:12):
has legitimately come out of Japan from many small businesses,
many large businesses where they're not reporting their positions right,
so which means I suspect they're still actually on a
private side of things a lot more short quotes yen
than people realize, which still means you could still have
another squeeze higher in the end. If that happens, that
still becomes problematic from a global deleveraging perspective. I think
(12:34):
it was more a preview what we saw August third
and August fifth. Now people hearing that will say, you've
been on that drum for the last two years. It's
not true. It's I've been saying this since August of
last year. It's just something to be mindful of, right
and for all we know, that could be why gold
is doing what it's doing. That could be why utilities
are doing what they're doing, because there's still kind of
a lingering concern that there is that tail event that
(12:56):
Japan could still spark.
Speaker 1 (12:59):
So let's talk about what you're generally bullish on and
versus what you'd still generally call yourself bearish on. Whether
it's asset class, a couple of names you want to
throw it I'll kind of leave it up to you
on that. But obviously we talked about gold, so I
assume you'd consider us. I'll still a bull there, correct.
Speaker 2 (13:14):
Yeah, I think the skepticism is still very real when
it comes to gold, so that you know, I always
go back to trends live on skepticism, they die on conviction.
So there's still a lot of skepticism ruggles. I think
gold probably does. I've been on that train since October
of last year as well. I actually do think small
caps are probably due to outperform. I mean instantly enough,
small cats versus large caps have actually held their their
(13:34):
ratio low from July. And yeah, it's meandering, it's not
having excitement, but it's basically kind of keeping aligning with
the SMP, which may be the first step to a
bottoming process. Now, the only caveaut there is small caps
can now perform by being down less. Right, So if
you're going to do a spread trade, you go long small,
short large. I think that makes sense, right, But but again,
I mean, every time it looks like that's going to happen,
(13:55):
small cats keep on weakening and weakening. I would personally
avoid tech. Now I've been wrong on that right, I
just happen to think that it's extremely one sided of
a trade. Right, it's been a phenomenal winner. I just
tend to prefer the idea that laggards become leaders and
leaders become laggards. Goes back to that point. Broadly speaking,
(14:15):
I think the I think the if you're going to
take a specutive bet, I think biotech hats to be
more and more interesting with every day that goes by
the reason I say that is, I think in terms
of factors, right, So, what's driving the biotech industry subgroup
the fact that a lot of them are smaller to
the small cap factor and the fact that there's a
(14:38):
sector component to it healthcare. Now, a lot of the
healthcare momentum has been written by these GLP one plays,
which has totally made everybody not look at anything except
the iLiads and artists is of the world things like that.
So people have ignored small caps, they've ignored everything except
you know, GLP one. That seems like a contrion trade. Also,
(15:01):
and again, if AI is real, you would think biotechs
would benefit the most. And nothing should be more apt
to the benefits of artificial intelligence than the complexity of
the human body. Right, So I think there's now the
copy of there, of course, is that you've got to
be careful with it. You know. It's obviously very you know,
syncratic in terms of the individual companies. But I think
that part makes a lot of sense from a longer
term perspective.
Speaker 1 (15:21):
Okay, I guess as we get towards the tail end
of this conversation, I mean, what is the one trigger
thing or indicator you'd watching that you're watching that maybe
signals you know what some of these concerns I having
I've been having it and speaking about are really coming
to the fore? Is it something in the credit markets?
Is a saying in equity markets, what specifically would you be
looking for? As assigned to people who follow your work, Hey,
(15:42):
this is the time to get more cautious.
Speaker 2 (15:46):
So if I've been right about anything about the diverse
carriage trade, is that it would bring back the behavior
of the flight to safety dynamics back into treasuries. So Ever,
since that happened from August fifth on, whenever the equity
market is down heavy, you end up seeing long eration
treasure yields dropping, which is very sensitive to me because
my funds are built on the very concept, right, my
(16:06):
mute fund on ets, so that that is I think
an im important change the way things once wore. Right Now,
in order for that dynamic to hold, you need to
have credit spreads widening, so difference between junk and triple A,
which is what forces the flight to safety, which has
been what's been missing throughout this. Now, if the unemployment
(16:27):
rate were to keep on rising and you do have
some kind of a recession, you would expect the credit
spread should widen because it's about to fault for us, right.
So I think it's interesting because actually leading up to
the fifty bases point cut, spreads were widening and then
they just cratered yet again. Yeah, so it was like
it's almost like the Federals trying to whack them all
that very quickly. Like they were you can argue in
October of last year when spreads were starting and widened
(16:49):
and then they came in and got the market. I
think six cuts were coming. Obviously they're looking at credit
spread its probably day to day no different than than
I am question just can they get ahead of it enough? Times?
So I think credits spreads are import and I think
the behavior of treasuries is important. The housing side of
it is going to be intriguing to see how this
plays out. Lumber has been obviously a week pretty much
all year. Home builder socks have been strong all year. Yeah,
(17:13):
there's different messages there. Goes back to divergences. Lumber is
a talent housing because of construction, but the homebuilder socks
are clearly saying there's a lot of activities still coming.
So we'll see on that end. But I think if
you're gonna rank them, i'd say, you know, credit spreads
become the number one thing to focus on.
Speaker 1 (17:30):
Mike, you're gonna be joining us for the twenty twenty
four Money Show in Orlando mid October. I'm curious, can
you give the sneak peek and made what you think
you're going to be talking about there? And you know
what somebody comes to your session is going to learn
and tack up.
Speaker 2 (17:42):
So you know I've been doing these Uh. I think
I've been like seven hundred different guests over the last
two years, right top five percent podcast downloads, and I
tend to not prepare it all. When I talk to people,
it's more just listening and you know, maybe interjecting except
my own thoughts on markets, but really just listening and
trying to two vectors off of conversation. So I think
what anyway that joins will hear is authenticity and a
(18:05):
legitimate conversation among two professionals. Hopefully I'm considered a professional
in the industry with other people that are coming from
the same place as I am. In that neither of
us will know wherever, whether it's me or the guest,
what tomorrow brings, but we'll try to provide some color
context around how we think about things. And from that perspective,
I'm excited because oftentimes, as you know, interviewing somebody in
(18:29):
person is very different than doing it via screen like this.
I think it's actually going to be a much more
natural and intriguing to have it one on one like that.
Speaker 1 (18:36):
Great. I mean absolutely one hundred percent agree with you there, Mike,
Thank you so much for insights. Viewers. If you're watching
you'd like to learn more about Mike's going to be
talking about again. He's going to be at The Money
Show Orlando. It runs October seventeenth to nineteenth at the
Omni Orlando Resort at Champions Gate and find more details
by clicking the link in the video description below. Don't
forget to like this video, follow us, subscribe on our
(18:57):
channel and you'll get more content like this. Mike good
talking to you. Can't wait to see in person again
in a few weeks.
Speaker 2 (19:02):
Yeah, I likewise, Mike, looking forward to it.
Speaker 1 (19:04):
We'll have more interviews for you every week, so I
encourage you to subscribe to The Money Master's podcast so
you can stay up to date with the insights from
top money experts. You can follow me on Twitter at
real Mike Larson and follow Money Show for more investing
and trading content on Twitter, Instagram, and YouTube at money Show.
Thanks for listening, See you next time.
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