Oil Price Shocks: Nicholas Colas Warns of Economic Spiral

Oil Price Shocks: Nicholas Colas Warns of Economic Spiral

in a market downturn you’ll probably lose less money being in value so if you’re worried that we’ve peaked out if you’re worried that growth has driven too much of the gains and so you swap into value okay you’ll lose 5% instead of seven or 10 per. is that great is that what you want does that make you feel better does that put the Tums back on the Shelf I’m not sure it does so at the end of the day you also have to think okay even value for us is a trade just like small caps are a trade em is a trade there’s a lot of great trades that occasionally that the market offers us but structurally speaking US stocks and growth stocks have been the big Winners and there’s no reason to think that’s going to change the growth is ultimately in a handful of companies driving really important technological [Music] change I’d like to welcome Nick CIS back to wealth on Nick is the co-founder of data Trek research also the former Chief Market strategist at convergex group [Music] Nick welcome back to weon oh thanks so much for having me now uh let’s get right into it I I know that a lot of indicators are you know economic indicators falling closer to where the FED would like them what’s your take on the economy right now and is it slowing and there’s that all that talk about recession is that coming to fruition do you think well the economy is absolutely certainly without a doubt slowing uh we’re seeing that across a wide variety of indic indicators most recently the latest Atlanta fed GDP now print which as of yesterday is looking for just 1% 1.7% growth in the second quarter and it was looking for like north of three at various points during the quarter so as the machines gotten more data about how the quarter has progress it’s clearly showing slowing in the economy we’re also seeing that with continuing claims that were out last week they hit a new high back to November 21 so the labor Market’s slowly cooling the economy is certainly cooling I’m not really worried about a recession just yet I understand why people are and for many people it’s felt like a recession for the last couple of years because of inflation but by the Numbers we’re not seeing yet the kind of Turning Point that would indicate we’re sure fire going to have a recession in the next 6 12 months so you think that soft Landing or or really no Landing is a definite possibility it absolutely is and I think you have to go back to the history of recessions in this country back to say 1970 and every single one was caused by some kind of shock things don’t just slide into recession without something else hitting the economy so could be an oil shock like in 73 or 79 or 1990 you know could be the financial crisis could be the pandemic crisis it takes a lot to derail the US economy which is one of its primary virtues and so I’m not super worried about a recession I am worried about a p a series of very slow growth quarters which will make it harder for companies to grow earnings but you know at a top down level not really worried about a recession because I don’t see the kind of shock that would cause a recession even in this geopolitical environment you don’t see energy like oil like sort of that sort of shock it seems to be stabilized between 78 and 85 so it really hasn’t with everything that’s gone on you would think that it has the possibility of shooting up but that’s not one of those things that you really worry about this time I absolutely do worry about it because you’re right oil is oil price shocks are the number one cause of recessions for the last 50 years and so I do think about it a lot we even had an oil spike in 2008 uh going into the financial crisis we were predestined to have a recession no matter what my rule of thumb is when oil prices double over a given year you’re all but certain to have a recession that’s been the track record since 1970 it would take a pretty big lift in oil prices to create that kind of shock now but it’s certainly possible and one thing we tell clients kind of non-stop is never be underweight energy in a portfolio because energy is your only hedge at that against that kind of shock you know for example in 1990 we had a very big surprise shock with the invading Kuwait and O the oil sector energy sector was the only one that worked and it worked fantastically well for the first couple of weeks after the invasion when nothing else was working so energy stocks are one very important hedge against the kind of risk we’re talking about go back to the first quarter of this year energy stocks was I I think the leading sector if I remember properly and uh you know let’s talk about that you know the first half of the year is over now and the stock market has done incredibly well and historically it could continue to to do well you know a lot of people like oh it did so well where it it’s going to take a down it might slow but do you see the stock market just falling off a cliff absolutely not um you’re right the Cadence of returns this year so far have been pretty interesting because in q1 for example the S&P was up 10% in Q2 was only up 4% so we’re clearly slowing now we were way overbought at the end of March and we but we still had some further gains so it speaks to your point about continued gains I do think we’re Peri in for a period of some volatility for the next month or two or three simply because things have gotten a little bit too crazy in big Tech in the US and there’s nothing else that really reflects that kind of strength and whenever you see that kind of one-sided Market with very low correlations between sectors or between US Stocks versus non- US Stocks you invariably get some kind of pullback that kind of resets the table and then allows you to move higher after that so we’ve had a great first half particularly in US Stocks not so much outside the US we talk about that but I do think we’re in for some volatility for next month or two and then a stronger fourth quarter it it seemed that in the first quarter a lot of stocks did very very well second quarter it was mostly technology that led the way do you see a technology pullback at some point I I know look when we talk about envidia there was a pullback do you think and now that I I don’t think the AI bubble is over but but I I think that maybe people after the second quarter just took some profits off the table and said’ look I’m going to take this I’ll let it go down a little bit and I I’ll put my money back in yes and you know we have to look at sort of the market outside the US as well so in the second quarter stocks outside the US you know the acwx ETF it was down half a percent in the second quarter and the S&P was still up 4% so it’s clear people are kind of hiding out in big Tech hiding out in US stocks and for a lot of very good reasons there’s still good growth here but we have to look at it sort of realistically and say you know there’s got to be a reset coming doesn’t have to be profound doesn’t have to be a big shock but there does have to be a reset so in instead of huge gains maybe like baby steps of think like Nvidia if it just keeps moving up a little bit at a time instead of the the 10 doll a day we’re in good shape because I that that volatility you spoke of earlier when things shoot up they’re bound to kind of fall off a you know a pretty big chunk as well is that historically what happens yeah it doesn’t even mean that they have to go down very much but it means that they have to stop being such such a hot boil um so for example Nvidia kind of reached a statistical Peak at the beginning of last month beginning of June and has been kind of trailing off since and if the his if history repeats itself it’s probably in for some churn for the next month or two because you get these big gains and the market has has to digest them and in the meantime they’re always looking for other things to to play so that’s how you get that that very low correlation ation between sectors and stocks in the market overall But ultimately those kind of correlations and we see this in the vix as well very low vix readings they don’t have to go back to 20 which is the long-term average but a 15 vix with a pullback in the market that makes a lot of sense to me is that right now the vix I think is in the neighborhood of 12 it is so the volatility is is sort of low I guess it is I mean the long-term average of the vix back to 1990 when it started is 20 and the standard deviation around that is eight so 12 is a one standard Dev ation below the average reading and typically speaking you do get long periods of sub average vix during bull markets we had the ’90s the 20000s a very long stretch in the 2010s so I wouldn’t be surprised to see the vix stay below 20 for the rest of the year because that’s what it does during bull markets and during what we call midcycle markets when there’s no recession clearly in the offing but at the same time you know as an investor you want to be thinking about not just okay where are we right now for the next couple of years but where are we for the quarters where are we for the month and in that regard I think we’re just a little bit exposed to a pullback now Nick I want to ask you we talked a lot of economists and then we talk to a bunch of market evaluators like yourself Market analysts and if you talk to Economist it’s gloom and doom recession is coming doesn’t matter what you do it’s it’s on its way but when I talk to you as a market analyst you’re like no actually things are are looking okay why is there such a discrepancy in the numbers or or in the way people look at the numbers um I think the biggest reason is that the stock market doesn’t discount GDP it discounts corporate earnings and that’s a big difference so an economist can be pretty cautious on the economy and I can totally understand why things are beginning to creep higher in unemployment the labor Market’s weakening growth is weakening but corporations manage through those problems they manage through in order to create higher earnings that’s just what they do and so the stock market can work reasonably well even if the recession is slowing and there’s a risk of the econom SL there’s a risk of a recession because corporations are working to tighten the belts cut costs and generate earnings growth and that’s what stock markets discount it’s you know GDP is interesting to the stock market but it does no effect really on corporate earnings unless there’s a big recession and because of that the stock market will look at earnings and cash flows and Returns on Capital and which businesses are doing best and Shuffle Capital off to those and if it means in the case of what we’re having now we have a handful of companies doing extremely well with very high earnings growth EX extremely high return on Capital then those groups are going to work and drag the market higher the stocks you talk about with the the high earnings growth that’s a select few and they’re kind of booing up the the indices um are are small caps following suit or is there a time for them to do better as well H small caps have been just a heartbreak heartbreak trade for the year you know they’re up 1% as of the end of the first half they had a decent first quarter up 4.8% they gave almost all that back in Q2 down 3.6% and you with yesterday’s pullback they’re very close to Flats look small caps are kind of a unique beast in capital markets and I think pretty broadly misunderstood they are often great trades coming out of a recession when high yield spreads decline when interest rates decline small caps do really well they’re a great trade for a year or two but they have some structural problems when you think about how a small cap index is created and maintained because ultimately the very best stocks um the ones that have grown the best the ones that have gotten to the top of the market cap Heap they got shuffled off into the Russell 1000 or into the S&P 500 and they leave the Russell 2000 or the S&P 600 small caps and so you’re perennially losing your biggest winners and if you look at how markets work over long periods of time there’s a great paper about this by a professor named bessin binder and he looked back from 1990 to 2020 across stocks around the world 64,000 stocks and he found that only one to two% of all the gains in capital markets for 30 years was created by just one to two% of companies so those companies and you know the ones it was Apple Amazon alphabet uh 10 cents in China J&J Exon Mobile a handful of companies create all the returns in equity markets over a long period of time and we’re seeing a microcosm of that right now in the large cap space but the small cap space keeps losing those names and so it doesn’t have as much of a leg up in terms of keeping performance High because it loses those High performing names that it really should keep for investors to enjoy those gains as they get bigger and it’s almost like when you do a really good job they ask you to do more is the small cap if it does really well well we’re going to move you up to the next the next level and leave the other small caps in the dust it’s a very difficult space to be so the Russell’s underperformed the S&P over the last 10 years but I think 200 basis points and this Dynamic is a big reason why is it time for us to get out of growth or or take some money out of growth stocks and put them into value stocks yeah that is certainly the question of the hour growth has had this tremendous run you know the problem with growth indexing and let’s take the S&P 500 growth index as an example is it’s super concentrated now the that index is 60% weighted to the top 10 names and we all know who they are and that’s an unhealthy level of concentration so what we’ve been telling clients is if you’re in S&P growth consider swapping into just S&P 500 because at least you get some more diversification there I wouldn’t abandon growth entirely and I would look at Value very carefully but just realize that the growth trade has gotten super concentrated at the upper end of the market cap range and you now do have a lot of single stock exposure in indices like the S&P 500 growth we got a lot of questions about volatility and people that don’t have the stomach for it is it safer to just go into the value stocks now because you’re worried that look you know it it it it the Run was so high or or so uh rapid and and did so well you know if I’m going to want to stop taking my Tums what do I do yeah it’s another great question and a great point and I would say I put it this way in a market downturn you’ll probably lose less money being in value so if you’re worried that we’ve peaked out if you’re worried that growth has driven too much of the gains and so you swap into value okay you’ll lose 5% instead of seven or 10% % is that great is that what you want does that make you feel better does that put the tumbs back on the Shelf I’m not sure it does so at the end of the day you also have to think okay even value for us is a trade just like small caps are a trade em is a trade there’s a lot of great trades occasionally that the market offers us but structurally speaking US stocks and growth stocks have been the big Winners and there’s no reason to think that’s going to change the growth is ultimately in a handful of companies driving really important technological change so yeah you can swap into value but then are you going to have the stomach to swap back into growth or swap back into the S&P 500 when that move is over and that makes us M that you know sort of creates two issues you have to resolve as an investor versus just sticking with whatever happens with volatility knowing that over the long term you’re in the right space what do you say to someone Nick who says you know what I’m going to time the market or I I I’ll never time the market when is the right time to do this switch it is a very difficult question to answer because it is comes down to a very personal set of choices about how much risk do you feel comfortable taking and how much do you know why are you doing what you’re doing it’s very important as an investor to have a general outlook for what you see happening in the economy and in the stock markets and in macro conditions in politics and kind of put that all together into a worldview that says I want to belong these kinds of assets for these reasons and then you kind of have to stick with them the worst thing investors do is let their emotions get the better of them and you know will sell at the bottom and buy at the top and in order to avoid that you got to have a game plan and for data Trek and the way we express it to our clients is our game plan is to be structurally overweight growth and US large caps against basically everything else in the investment Equity investment universe and we know there’s going to be some volatility along the way but that historically generates the best returns it focuses on the handful of companies that are going to win which is what the long-term record says you should do and if you have to eat some volatility along the way that’s the price of those returns we try to help investors pick pick points where volatility might increase like we talked about the top of this call the next couple of months do look choppier for us but at the same time either you lighten up or you just accept the volatility is coming and half of the game is being prepared if you think the volatility comes and it does you’re prepared it hurts a little bit less when you see those draw Downs when when you say it looks a little choppier than it was what are the economic indicators you’re looking at that dictate you know what maybe the third quarter will be I I know that the summer months are in there and things tend to be a little bit slower in the summer months what what are the economic indicators you’re looking at to say yeah you know maybe it’s not as rosy as it was but still not going to be bad there’re not so much economic indicators although you know we talked about how the economy is slowing but not not yet in recession uh not yet shrinking and so we want to make sure that we’re not at at a economic Tipp point and nothing in the data says that we are we’re seeing still very modest uh initial claims every week we are seeing some uptick and continuing claims which tells us okay demand for labor is slowing a little bit we understand the FED is very focused on now on just not just inflation but also on job growth and sees the labor market slowing so the backdrop is slowing growth but not recession so that kind of checks the Box on we’re not walking into a buzz saw in terms of an immediate recession then we look at stock market indicators and the chief ones we use are correlations how much is one asset tracking the other and we do it by looking at an average of big S&P sector correlations and that’s important because when investors get too confident invariably correlations go down a lot and that’s because they’re picking and choosing hey I want to be long tech I want to be long energy I want to be long financials and they’re picking and choosing which ones they want to be in in a sort of peak enthusiasm Peak confidence Market those correlations get very low that’s where they were just two weeks ago and so it tells us and you know they were at levels similar to say July of 2023 when the market topped out for the the summer and then had that very tough decline through October we similar levels to those now the same thing goes for US Stocks versus non- US Stocks because investors have favored US Stocks so much there’s been a big break in the correlation between us and non- US Stocks so those two things are signaling to us there’s a bit of overconfidence in the market a bit too much of just picking the obvious winners and typically when that happens you get a pullback because something comes along and kind of makes investors question was that the right trade and then they kind of bail out of it and the correlations go back up again because when you when markets go down everything goes down and correlations tighten up do you see pullbacks coming more pullbacks coming or are we sort of on a Level Playing Field right now and just waiting for something to happen to either go down or go up um I think we are if I had to bias my answer be saying we’re walking into Q3 earning season right now that will have its usual we have some very high expectations for a bunch of various systematically important names I’m not saying they’re going to miss but even if they just meet expectations or beat by a little that might deflate the market a little bit by saying wow I thought they’re going to beat by 10% they only beat by the usual seven and that could cause the pullback that we’re talking about and there’s a lot of cash on the sidelines I guess right now if you put it into a high yield money market you’re getting 5% anyway what has to happen for that money to get put back to work in the markets yeah the history on this is very very clear we’ve looked at this back to the 1980s the only thing that pulls money out of money market funds is lower yields so the FED literally has to go through the rate cut cycle and even then it takes some time the first cut doesn’t really reduce money market fund balances it’s the second third fourth fifth cut where rates come down pretty noticeably where investors say okay I used to be getting five now I’m only getting four maybe okay I I I’ll invest some in longer term assets because I want those longer term better returns but it takes quite some time that money on the sidelines historically stays on the sidelines for quite a lot longer than you’d think and it’s only serious Fed rate cuts that say to investors okay it’s time to get out of 2% yielding money market funds and buy corporates or buy stocks or buy other assets do you see a cut coming this year I the data certainly uh is trending in that direction do you see and that’s all the talk is that I think there’s at least one built into the market to this point do you see one coming yes absolutely you know the thing that has convinced me of that is the continuing claims data last week ticking up to new new multi-year highs that tells me the labor market really is slowing I think we’re going to see confirmation of that in Friday’s jobs report and I think we’re going to get two rate Cuts this year one in September one in December because it’s very clear that the labor market is slowing enough that the FED has to pay attention to that the last thing they want is for a labor market driven recession to start happening in the back half of the year or the first quarter of next year they’ve done a reasonably good job at keeping the economy on the right track for the last two years even with those very aggressive rate hikes and I think the last thing Powell wants is to kind of ruin his legacy of having dealt with the pandemic dealt with the inflation and not crash the economy and I think his bias is to cut sooner rather than later as labor market cools so I do see two this year and two in the first half of next year basically a cut every quarter starting in September very nice that that’s music to a lot of people’s ears I know I I read an interesting article since we’re talking about unemployment and we always hear about the CPI and the pce but the FED really keeps an eye on that unemployment number don’t they they do I mean you know there’s a dual mandate at the FED one is inflation and the other one is labor markets and full employment and they would at the margin would like to keep full employment but it’s very hard to parse because embedded in the labor market data is wage growth and wage growth have been running much higher than pre pandemic for many years now and that wage growth to some degree enables inflation and that’s a difficult sort of feedback loop for the FED to manage so they’re trying to bring inflation down in part by bringing wage inflation down which in turn is driven by reducing demand for labor by cooling the economy but it’s a very tricky Balancing Act and while historically speaking as we talked about shocks create recessions the FED is also ATT tuned to not leaving the economy so weakened that even a minor shock would cause a recession so cutting rates sooner rather than later is the best way to do that I I read a an article and it’s I guess without laying people off there’s open jobs that companies are now cutting they said okay you know we’re just not going to fill that job so in essence they don’t have to lay anybody off but they’re not hiring anybody either so the rate of hiring is going down the number of open jobs per applicant I guess is going down is that something the FED looks at as well it is pal talks about this literally at the top of every press conference it’s his go-to move basically and he compares the jolts data which is actually is out today um with of job openings to the number of unemployed people and the ratio is still much higher than one: one there’s actually more nominal openings than there are unemployed people which tells you there’s still quite a bit of demand interestingly this was also the case just before before the pandemic this labor shortage America has been has been dealing with actually predates the pandemic and predates the very high level of openings to unemployed it’s coming down but it’s still higher than it was at the end of the last expansion in 2019 so openings do have to continue to come down and let’s face that the openings data can be a bit squishy I think we all know companies post jobs that they’re not really intending to hire for unless some Superstar happens to come along which is rarely the case obviously so I think it’s also companies getting a lot more realistic about what their demand for labor should look like and what should be so openings have come down quite a bit as well and it all reflects that companies are getting a lot more realistic about the economic situation which they can see is slowing the effect of inflation on consumers which has been horrendous and having to reset their business models and reset their cost structures to deal with the world as it will be not the world that we had in 22 when demand was off the charts and inflation was hot but still everything was pretty strong and companies are getting a lot more rational about their cost structures and that’s what propels earnings and that’s what helps stocks as we head into earnings season now that the the second quarter is over um obviously companies may not because the economy is slowing may not do as well but it’s always the forward-looking guidance and I if rates do begin to come down if the FED does cut it’ll be a little bit easier to borrow money for companies to put more into r D or building new things and uh do you see maybe the like a one quarter slip with earnings and then because rates might come down forward guidance because let’s face it that’s what usually pushes the the the stock price up or down it’s not how you did it’s because the earnings are what happened in the past and it’s like okay what are we doing in the future so with rates coming down do you think that the forward guidance of this earning season might be better than we expect well well it’s it’s a tricky it’s a tricky dynamic because the the the phenomena you describe really exists in small cap stocks so they often require extra Capital to finish their growth plans could be a biotech company you know could be an industrial could be a a high growth name that just isn’t making a lot of money right now but it needs access to capital for them the lower rates are going to help a lot because it does reduce their cost of capital so on small caps super important issue but small caps also don’t have the same advantages that larger companies do in dealing with a slowing economy so they’re probably already running pretty lean they don’t have a lot of fact to cut so they’re going to see an earnings hit so if a smaller company’s worried about the economy they probably do guide down because they’re looking at their cost structure and saying we don’t have a whole lot to cut now larger companies have the economies of scale to deal with the slowing economy better so for them they might say look there’s no reason to cut our guidance or sound cautious on the second half of the Year we’re doing the right things we have a lot of advantages if we need to cut some some headcounts modestly we’ll do that if we have to cut some outside spending we’ll do that but they have a lot more in the cost structure they can potentially Trim in order to make those earnings expectations and the point you raised is super important by the way because S&P 500 earnings are expected to go up every quarter for the rest of the Year by anywhere from 3 to five% the usual growth rate sequentially is more like two so stock market analysts are looking for some very heavy growth numbers and kind of all-time record earnings by the back half of of this year in order and and they want companies to confirm those and companies are kind of over a barrel where they have to meet analyst numbers and so they don’t want to guide down so the obvious offset is we got to cut costs so I think you’re going to hear a lot about cost cutting and margin Management on Q2 calls and that’s how we get to the earnings numbers analysts expect and that’s what justifies the S&P at a record high level but the Russell obviously not because the small smaller companies don’t have the same advantages are we looking at Big Tech or there other sectors that people are thinking oh you know second quarter is going to be really good for this this sector well I’ll tell you like for example let say take the Industrials which you know had a pretty good first quarter and and not so good a second quarter and that’s one space where expectations are extremely low analysts are looking for basically flat revenues flat earnings large cap Industrials are an interesting space because that group worked really well and then didn’t but all the things we’re talking about here uh looking at you know how the economy is shaping up looking at how companies are cutting cost to create earnings growth that affects Industrials more than most they have very high fixed cost structures they can cut those cost structures and improve earnings so that’s one area I would be looking at in the second quarter for some better news and expectations because as you point out it’s all about expectations right if you can beat by a couple of percent more than the market expects your stock goes up if those expectations are low all the better you know we just got through the first presidential debate and obviously earlier than we expected do you see a a switch you know uh we we read we see the news we read all about how each candidate did and I won’t get into that but do you see a switch in different stocks that are sold off or bought because of what happened in the debate and what you know who everybody thinks is going to be elected president I mean there’s some obvious sort of churn and names like the the Donald Trump’s uh Spa so on a single stock level you absolutely do at a broader Market level it’s it’s more of a macro dnamic we were just in in in Europe visiting with with a lot of institutional customers and two-way meeting every single meeting the first topic was the US elections now part of it’s because we’re a us-based firm and the European investors want to hear our point of view but it was very clear to me that a lot of them are just not going to invest a lot in the US incrementally until the election is over so it creates a bit of a freeze on global asset flows because they just they’re very sensitive to economic and political um disruptions we saw that in the UK we saw saw that in France and they feel that the US they’d rather just waiting to see who wins not just the presidency but also Congress before they make a lot of incremental investment decisions so it could create a bit of a near-term freeze on global CL Capital flows into US Stocks simply because not that they’re looking for bad news or worrying about what might happen they just want to know what is going to happen and that kind of uncertainty has a tendency to reduce investor interest haven’t heard that as much from us clients yet there’re still still focused on you know how do I beat the market in the third quarter but definitely from a Global Perspective I see that happening it’s it’s a bit of an interesting Dynamic where again they’re not worried about one candidate winning over the other they just want to know who’s going to be in charge I I’d love to they may not have shared it but I’d love to get their take on who they think would be the better president but uh you know um let’s talk about the bonds and and interest for a minute the debt Nick is gone crazy and it’s going to cost us down the road but obviously lowering interest rates is going to help the debt rise slower I guess than than it has been H how do we get out of this rut and and you know wor and who is worrying about the debt it seems that you know e both these candidates will continue to spend our debt will continue to rise and it’s going to create a an even bigger problem than it is now yes it’s it’s a super important Dynamic I make two points the first is what’s really interesting about this latest round of incrementally a much larger federal debt is that it yet hasn’t yet really affected bond prices so if you look at real yields real ex inflation yields over the last call it 20 years back to 2004 five six you’ll find that real yields are no higher now than they were pre financial crisis they’re running around 2% so if you take inflation expectations of a little bit over two and real yields make the balance you get to the 45% 10-year yield that we have now now so real yields are no higher than they were pre- financial crisis when you think they would be because pre-financial crisis we running 60% Deb to GDP now we’re doing 120 nominal and yet yields are not reflecting any kind of incremental risk we also see that in the corporate bond market so again you’d think that if people were worried about the federal debt they might want to buy AAA doublea corporates because they’re very safe and they’re very well-run companies with great competitive advantages great cash flows and yet the spreads of aaa’s doublea’s single a over treasuries are just as the same level now as they were pre financial crisis so the market has not yet Incorporated the federal debt problem that we all recognize into bond prices because the dollar has remained the reserve currency if the dollar is up call it 34% since 2010 versus the basket of other currencies so there’s nothing yet triggering markets to a knowledge that the debt issue is a serious one simply because the dollar is still the world’s Reserve currency vat currency so we’re not yet seeing the tension in markets that you would expect given these very large deficits and that’s both a good thing and a bad thing the bad thing is it doesn’t create any Catalyst for change which I think we would all agree the US needs on the positive side it does maintain the government’s ability to borrow which is very important for economic growth you know more broadly the issue about the debt is and again this comes from conversations we had with a lot of European investors they don’t don’t so much mind the debt because they feel the US economy is better structured than any other Global major global economy so the Swiss the Swiss have a great economy but it’s a very small the US has a very strong economy with a lot of innovation and a lot of growth and a lot of systematically important companies and they see that is kind of the offset to higher federal debt levels so yes they would also like the debt to be lower they think it’s kind of unwise to issue so much debt but they recognize that the money goes into the US economy which is still the best structured economy in the world both in terms of its labor force uh flexibility and in terms of innovation so we end up with a situation where yeah the debt is crazy but at least it’s going into the US economy which is by and large a better structured economy both for the current and for the future than anything else in the world and the issue with capital is it has to go somewhere so Capital chooses destination and it’s still choosing the US even with the debt even in of the debt because the other Dynamics in the economy are so good I was reading this morning that the yield curve has been inverted for quite some time but is now sort of trending in the right direction is this what you’re seeing yes I was actually just looking at that uh yesterday potentially right about this week for our clients you’re right it has been really really stagnantly negative for several years now and we all understand why and what that means I don’t know that the yield curve is going to un invert um say this year because we’re going to need you know not just a couple of rate Cuts but the virtual certainty of further rate Cuts in order to bring the short end of the curve down so no unfortunately I think the the yield curve on the plus side it hasn’t you know it’s called the recession indicator right when when twos or 30 30 days yield more than tens you’re going to have a recession that hasn’t happened yet and the signal basically is kind of broken right now so on the good side it hasn’t created the kind of uncertainty and the kind of contraction that it usually does on the negative side I think we’re going to be lingering with his inverted Yi C for a while longer one of my last questions Nick is AI still The Craze is it still it it seems to people are are wondering oh has it been knocked off as pedestal is it still the craze is it still something that we’re getting into it is it absolutely is and I’d say you know my biggest sort of top- down view of the world is that the stock market right now looks very much like a combination of the 1980s and the 1990s in the 1980s from ‘ 84 to 86 the FED finally decided it’s in fight with inflation from the early 80s was over and it cut fed funds from 11 to 6% between 84 and mid 86 and we’re getting the same kind of dynamic now and that created a very strong run in the S&P the S&P doubled in two and a half years through June of 2000 of 1987 so you have a had a very strong run just on Fed rate cuts the other part of the story in today’s market is the late 1990s with that you know massive run in internet1 o.com stocks and we’re getting the same kind of dynamic in with the AI stocks now so it’s not just the AI craze which I think resembles the docon bubble in its earlier phases very strongly but it’s also the Fed rate cuts and you can put those two together the intersection of that vend diagram is the current market and those are two very powerful forces the difference between now and the 1990s and I I lived through that age and was at sa Capital with Steve Cohen when it was hitting its peak and the difference now is you have a handful of companies because generative AI requires a ton of capital to implement so you can’t just start a website get $10 million and go public in a year at $200 million you need a couple hundred billion dollars to build a good geni model and that limits it to a handful of companies so we’re getting all the concentrated energy of a of a do com style boom but just in a handful of companies and we all know the ones they are so that macro backdrop is very good for equities very good for the next couple of years but at the same time it’s going to feel very awkward very scary because it’s not a couple of hundred companies going public that we can all pick and trade and choose it’s going to be a handful of companies are the big Winners and they’re probably most of them already public are there a lot of tentacles to this companies that are going to feed off of the the AI craze and and and do well because like are there some small cap stocks that have technology that AI is going to need and are there a lot of different Avenues to AI that will help a lot of different companies you know there should be but there really unfortunately are not just yet so for example smci huge winner from geni over the last 12 months really one of the more dramatic stories in markets aside from the big Tech names not a lot many people know about it but it’s been fantastic unfortunately it just left the Russell last week in the rebalance so we just lost you know one of the few great geni plays out of the Russell 2000 it’s it’s now the Russell 1000 which is where it should be based on market cap but again this is the dynamic that we’re talking about at the top of this conversation where small cap stocks just don’t hold on to those kind of big Winners now will there be another one perhaps but invariably it’ll graduate out in the next year Well Nick thanks so much for joining us we uh this was fabulous I think a lot of great information as always where can we find you uh either on social media or read your newsletter um just go to datat Trek research.com and there’s a little box at the top of website where you can sign up for a twoe free trial excellent he thanks so much we really appreciate you coming on and uh it’s it’s always a pleasure to have you thank you thank you so much that’s a wrap on another discussion here on wealth on thank you for joining us if you need help being financially resilient please head over to wealth on.com sign up for a free no obligation portfolio review with one of our registered investment advisers and remember please to follow us on social media for the latest news and information to help you invest wisely if you could like and subscribe to the channel we greatly appreciate it don’t forget to hit the notification Bell so you can find out when we post new videos to the channel thanks again for watching until next time stay informed be empowered and may your Investments flourish and if you like this content please watch this video next

Nicholas Colas, Co-Founder of DataTrek Research, provides critical insights on the current economic climate, inflation, and potential market downturns.

In this episode of Wealthion, Andrew Brill hosts Nicholas Colas, Co-Founder of DataTrek Research and Former Chief Market Strategist at Convergex Group. Colas offers his expert insights on the current state of the economy, highlighting the risks of inflation and a potential market crash. He provides valuable advice on how investors can navigate these turbulent times and protect their wealth.

Join us as we delve into the indicators pointing towards economic slowdown, discuss strategic investment approaches, and explore what the future holds for the market.

TIMESTAMPS:
00:00 – Introduction
01:03 – Current Economic Climate Analysis
03:00 – Oil Price Shocks and Recession Risk
04:42 – Market Performance and Potential Pullback
07:50 – Volatility and the VIX
09:01 – Discrepancy Between Economists and Market Analysts
10:16 – Small Caps Performance
12:25 – Growth vs. Value Stocks
16:24 – Indicators of Economic Slowdown
20:24 – Predictions on Rate Cuts
23:05 – Job Market and Fed Focus
25:28 – Earnings Season Expectations
27:26 – Sector Performance and Expectations
28:49 – Impact of US Elections on Investments
30:12 – Concerns About National Debt
34:00 – Inverted Yield Curve
35:13 – AI Craze and Market Impact
37:29 – Small Cap Opportunities in AI
38:12 – Conclusion

#podcast #business #finance #investing #economy
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