On this episode of newts World, I'm talking with Anthony Esposito, founder and CEO of Island Capital, co host of the Policy and Profits podcast about the recent stock market volatility, the Federal Reserve, and the tariffs, and as you can imagine, it's hard to be more relevant right now than those Anthony, welcome and thank you for joining me a newts World.
Mister speaker, thank you so much for having me. It's a pleasure to be here.
So, given your experienced background, how do you see the current situation in the stock market.
The current situation in the stock market, and I was pretty vocal about this back in December and January. I write a morning note where I was very vocal about it. I was out on some TV hits and out on.
The podcast as well.
We were seeing an overextended, over leverage stock market coming into December January. My technical model and I run a technical top down model here, so I'm not looking at fundamentals,
I'm not looking at earnings reports. I'm really watching price momentum and trend I was watching those indicators in my model break down, and for the first time in a while, it was breaking down on not only my daily count so that would be the quicker trade, but it was breaking down on the weekly and the monthly count, so the daily count quicker and more active, but also intermediate
and longer terms. I was seeing what I was started to call in January as a topping pattern, which typically would occur as bull markets end and bear markets begin. That is exactly what we saw now. I know the headlines become interchangeable, and tariffs are a major headline, and this is a major discussion as it creates a lot of questions moving forward for the markets, for earnings, for investments,
for the economy. But I would say that right now we are moving through the beginning phase of a bear market. I think we took that twenty one percent down move or so in the SMP cash and now we're kind of seeing some volatility which is extremely emotional and attached to again topics like the tariffs, and we are heading
into earnings and so on and so forth. But I see the market as running its course through a bear market which started at a peak of about sixty one point fifty, just above sixty one hundred on the S and P five hundred, and I see us in a process of moving down towards forty two hundred or thirty seven hundred on the SMP, in which that process we'll see a ton of volatility, very aggressive bear market rallies, which is nothing new, and some really heavy selling on
days where the headlines don't work or where you have managers or hedgers just unwinding positions.
How much of this do you think was sort of baked in no matter who won they and how much has been made deeper by Trump's activity, particularly on terrifs.
That's a great question.
I think, broad stroke, the market was ready and poised to fall regardless of who won, and I think a lot of that had to do with the policies of the previous administration. And what I mean by that is we had a GDP growth, a nonfarm payrolls growth, and a market that was basically supported by government spending, and
that in and of itself was a kfab. It was a complete smoke screen if you look at the percentage of jobs created that were directly or indirectly funded by the government, or were direct government jobs.
If you look at GDP growth.
As direct payments from the government, you were looking at about eighty percent of the jobs created were either funded by the government or low paying services jobs. That's not where we want to be. And the adjustments down upwards of a million jobs at the end of the year that were never created that were reported. If you look at GDP growth, we were looking at fifty to sixty percent of GDP growth directly or indirectly funded by the government.
That was debt creation, that was tax dollars. So not only is that not real growth supporting the market right, supporting growth and earnings, but it's also extremely inflationary, which is exactly what we saw. You can also go into consumer spending, which is a driver of earnings for the S and P five hundred, consumer spending was also being driven by transfer payments from the government. So we had an administration that hid the fact that we were actually weakening as.
Far as GDP growth, that we were.
Weakening as far as manufacturing jobs, which have been technically intercession for two years, and they hid that by spending overspending, printing money, taking on more debt, and actually weakening our position as they said or tried to present us as we were in a stronger position. What that did is it created a floor or a put for the market and everybody played a long from the twenty twenty two lows through the twenty twenty five highs, we saw a
narrative of AI, a narrative of continued growth. Really pump through the markets and keep those models running and keep that narrative moving when under the cover, we had really seven names that were carrying the entire SMP five hundred, and it was on a narrative that was really falling apart. So the market, regardless of who one was poised to fall, we were overvalued, we were overlevered, and the breadth was
extremely narrow. Now, what I would say is as we come out of the election and we head into this tariff conversation, which is the Trump conversation. Remember we had that massive rally coming out of the election. Everyone ready for President Trump, for America first, for true growth, for a restructuring. But it's kind of like you don't realize the pain that you may need to go through to restructure.
We have decades of problems to fix here in our trade deficits, which I think is the real tariff conversation. Our trade deficit conversation is a fifty sixty seventy year old conversation and that takes time to fix. So where the market would have fallen anyway with a Harris administration, I think it would be falling into a bottomless pit. The market falling with the Trump administration is kind of the grime through the cleanup of the problems left to him.
And I've made this joke and I'll say it because I think it makes sense. You know, clean up on Aisle seven. We're trying to get from the Biden administration over to the Trump administration policies. So the process of fixing and changing policy to seeing the effect of the policy is messy, and the risk markets the stock market, that's the mop. So as you're cleaning up the mess, all the dirt, all the grime, all the chaos is going to be in the markets. You're going to see
it every day on the headlines. You're going to see it in the newspapers, You're going to hear it on the news.
But at the end of the.
Day, we're heading to a better spot under the Trump administration, whereas the Harris administration, I think we would have been heading into a bigger mess, and we would you did quite a few moths, so the sell off was coming, But I think the pain that we're going through will be productive in the end.
I'm curious to get your reactions. I tell all of my friends, don't look at your stocks until August of twenty twenty six. You're just gonna have turmoil and you're gonna get heartburn. But sometime around the summer of twenty six, my personal belief is that the investment boom and the various things will all begun to hit and all of a sudden, my guess is the end of the bear market will be in the spring an early summer of twenty six. What's your reaction just to that observation.
I think that you're pretty much spot on.
I love your thought on the investments actually starting to take off.
So I've said previously that.
The investments that were the onsharing of manufacturing, the onshuring of investments, and we've seen trillions of dollars coming in and be committed. Those, if you notice, those became the secondary tertiary headlines and everything became the tarre corf.
President Trump is crazy.
We're kind of reverting back to the same old tantrums that we had. But what I believe will happen to your point, mister speaker is as we come through the mess of the cleanup and the clouds kind of clear, we're going to realize that there is a massive amount of reinvestment on sharing and new investment in the country. And what that will do is that will create a v spike recovery and economic growth in this country, in jobs growth in this country. I think the market will
be absolutely on fire now. I say that, I think super insightful. I love the point you're making. I say that as an individual who's running a portfolio here under Island Capital, we are actually up thirty eight percent year to date as of this minute. I've been ahead of this and I'm really happy being short or long.
For me, I don't care which way the market goes.
My model doesn't care, which is kind of why I'm a technician and a CMT, and I like to look at my models, my signals. I can basically work in a vacuum and the price and price action, along with trend and momentum, will tell me what's going on. I know if the news is good or bet or if the market looks at it as good or bad.
Are you significantly into gold? I have.
Gold is one of my five main areas or sectors of investment.
Yes, it's good because that has really gone way up.
It has it has.
I actually had a call out in gold to just be perfectly upfront on December twenty seventh, as gold was breaking above twenty six hundred, I put out in my morning note, which is typically just the S and P five hundred. I keep it very simple. It's not my full model or my full universe. Everyone watches the stock market, so I write on the S and P five hundred. I put out a strong buying gold and called for
three thousand. It's been an absolute charm of the contribution, the attribution in the portfolio.
As far as gold goes, I can't complain about.
It has gone way beyond three thousand and way faster than I expected. But it's kind of worked with negative correlation to the market right as we've seen this fear really.
Flow into the market quickly.
With this massive draw down, we've seen a real rush into gold and into not only individuals buying gold and funds buying gold and retail buying gold, but more importantly, the sovereigns have been all over the gold purchase and chasing it up. So phenomenal move, and I think for all intents and purposes, we could seek some consolidation lower to the three thousand level, but I think it actually has more room to go to the upside.
One of the things I did notice is that the ten year treasury got to four point four to one percent, which I think partly tells you how much challenge they have in placing all the bonds. But how do you interpret where the trail renoes are at and what the federal reserves should be doing.
So the move in the treasuries is interesting. I'm not sure whether it's a structural change in the debt market or whether it was part of a bigger unwind of what's called a basis trade in fixed income and in the treasury. So the basis trade, essentially is you have a trade which is trying to make money, and it's a massively levered trade on Wall Street, and some of
the largest multistret funds are in the trade. Significantly, you are essentially trading the basis of the ten year or the bond versus the futures out on the curve, and you're trying to make very little spread on a massive amount of investment and that's where the leverage comes from, and that's where the trade unwind becomes that important. We've seen the tenuere now spike from four percent back up towards four point four.
The investors that were in or the traders.
In that trade were long the bond and they were shortening the curve out and trying to make that spread. So now to unwind that trade, they need to sell the bond. As they sell the bonds, that spikes yields higher because there's an inverse relationship between price and yield. So I think part of the spike we've seen back up from four to four point four to four point
three today has been the unwind of that trade. I think that that will settle back in and the ideas it'll stay between four and four and a half percent,
I think it'll actually come in lower. I think with a change in some regulations and a change in the offering of the duration by the Treasury, I think that we will probably get more demand into the ten year and will pull that ten year yield down, which is something that Secretary Besson has spoken about and I was actually very happy to hear him speak about a month or two ago closer to two months ago.
Because the real cost.
Of borrowing in this country is not correlated or directly related to the FED and the FED funds rate. That's the headline number. That's the thing that the stock market is constantly chasing, and the FED has been very happy to be somewhat artificially supportive of the market, and which
is not their role. The tenure yield will determine more directly the cost of the thirty year fixed the cost of a car loan, what you pay on your credit card bills, what you can go and get a loan at the bank, a personal loan at So this is really should be the focus.
In my opinion.
Secretary Besson is the first Treasury secretary of the first member of any administration to speak about the tenure yield in realistic terms versus the FED funds rate. So I
think that the tenure yield will come in. I think there will be more support for the bonds, and I think, in my view, we'll see the tenure yield closer to three and a half percent, which will be beneficial for everyone as far as economic growth, and also benefit the refinancing of debt for the government, which is a major issue the FED right now, if you'd like me to kind of shift gears and go to the FED, I'm not happy with and I've been vocal for whoever's listening
with mister Powell. The idea of him being independent or not independent, or an independent FED or not an independent FED has nothing to do with President Trump. I think mister Powell has shown himself to be very politicized and very biased. He has not performed well in his role.
And I can go back to twenty eighteen and speak about some of his rate decisions and asset purchasing decisions, balance sheet decisions which have been very questionable, but most pointedly, to cut rates by fifty basis points, which was almost an emergency measure in September heading into an election, and then two more cuts of twenty five basis points was clearly political. There was no reason to do that for
a FED that's quote unquote data dependent. We saw a chair that was really making decisions that was a contrary to what a lot of members of the committee were saying, and b made no sense. And now that President Trump is in office, he came out on the sixteenth and said he is not supportive of rate cuts. They don't
see any issues there on their hands. They have nothing to do like his view and his actions are so illogical and so badly timed that the idea that he's not political or should still be in that role is actually crazy to me, To be perfectly honest, in.
The old days, the job of the Fed was to protect the dollar. We then passed the Humphrey Hawkins Bill, which said, oh, and they also was supposed to worry about unemployment, which I think made them schizophrenic. And I think we'd be much better off to go back and say, your number one job is to create a stable dollar and to take the steps necessary so that if I have a dollar this year, it'll be worth a dollar in ten years, and that would be a very dramatic change from where we've been.
I agree with that, and I think that they are a major piece of that puzzle. I think that the Treasury, the amount of debt that was created under again Janet Yellen's watch, where Powell was completely silent. He had nothing to say about it, and in fact he said when asked,
I don't comment on fiscal policy. Well, that stance has now changed since the administration has changed, but we'll leave that be for him to watch Janet Yellen create upwards of sixteen trillion dollars in debt under her watch and not have any idea where inflation came from, and then say as President Trump takes office, oh, I know where inflation comes from. Now it's President Trump and the tariffs.
This is the problem. As Janet Yellen waved on the way out the door and said, hey, you guys might have a debt issue like these are the things that make me laugh. I think the FED would be better served, yes, focusing on price stability, and the idea would be that with price stability, employment will follow. The system does work, the ecosystem works. I think the FED is confused in
their role overall and how to accomplish their goal. And I would add to that, mister speaker, that when I listened to mister Powell and miss Yellen speak about the environment the ozone equity in their deliveries, not that those things are are not important to me. I won't get into that, but it's not part of your mandate. This is not the ball that you need your eye on. I think they really have lost their way. So a Secretary Bessett now at the Treasury is a great change
of pace. I think that the FED, to your point, would be well served to focus on price stability and the dollar.
I think Bessett is far and away both the most technically competent and the most stable member of Trump's team, and I think that he probably will carry us through all the tariff negotiations and all the challenges with remarkable skill. He strikes me as a very, very competent person.
There's no question.
I've actually referred to him often, most recently with poise. I'm from his world, and I understand what he's trying to accomplish and how he's trying to accomplish. Its a massive amount of knowledge, and he has superb poise, which is something that we've been missing certainly in the last administration.
I mean, called a free for all is probably kind.
His poise and his expertise are just exactly what we need here, and I'm very very happy.
The big bold challenge of all this is the effort on tariff's what's your reading on that?
So the broad stroke for me on tariffs is it is a conversation well overdue. We have a massive trade deficit issue, and I think that's more the issue than the actual tariff conversation.
I think it's a very difficult.
Problem to fix, as is any problem that's developed on a global stage over decades. But I think that all of the efforts being put forth by the Trump administration are certainly well thought out and well planned, regardless of how they appear, and we'll put the United States in
a better position as we move through the resolution. I don't know exactly what the tariff rates become, but I do know that with our trade deficit at negative three to four percent of GDP, what we're essentially doing and have continued to do, is we've transferred our economy from a manufacturing economy to a consumption economy, and by doing that, we're sending US dollars overseas. So that trade deficit is important.
It's not that it's not important, and we're part of this beautiful global world trade organization where we're all happy and healthy.
When you send.
Dollars overseas, you're basically handing over our wealth to foreign nations. You're giving them investment funds in the United States for them to come back and buy us assets, whether those are art assets in real estate, whether those are treasuries, whether that's interest in our stock markets or our companies. We are essentially transferring wealth away at a rate that's not healthy. A three to four percent of GDP trade deficit is not where we want to be, and we
don't want to be purely a consumption economy. If we look at China on the other hand, which is really a manufacturing economy and not a consumption they're not consuming nearly what they manufacture and send out. I think the point to the entire trade deficit tariff conversation brings us to a place where we're reducing our trade deficit. We're raining US dollars back into the country, and to your point,
mister speaker, strengthens the dollar. We don't want a slush of dollars out across the globe or within the domestic United States. That's not healthy for the dollar. That doesn't
create a stronger dollar, creates a weeker dollar. We want to rain dollars in, and we like a country like China to balance their economy with ours if they become a little bit more of a consumer and reduce manufacturing, because we've now on short manufacturing and we become a little bit more manufacturing, which is where we should be and what we are good at, we are the best.
That starts to create more of a balance. And I would say that if not to pick on China, but if countries like China abided by the rules of the WTO and actually played a fair game as far as intellectual property, as far as barriers, we would be globally in a better place. I think that not only globally in a better place, but the United States would be in a stronger, better place, which is the goal of the administration and the goal of the conversation. It's not
a random argument, it's not random numbers. The tariff conversation and the trade def as a conversation for President Trump is something he's been talking about for forty years, and it's part of a bigger puzzle, and it's part of a solution to a bigger problem which ties right back into fiscal policy, monetary policy. What our manufacturing levels are, our consumptions levels are, the strength of the dollar, inflationary pressures,
They're all connected. I think the conversation is a hard one, but one that we need to have, and we need to work through this process to become truly strong and truly better and see real growth here once again.
As it struck you that we're seeing a lot more coverage of tariffs and almost no coverage of the scale of the announced investments. There are two Swiss pharmaceutical companies between them have announced ninety billion dollars in investments in the US, just those two companies, And every time you turn around there's either an auto company or there's in videos now putting hundreds of billions in. It seems to me that that in the long run may actually be a bigger story than the tariffs.
I absolutely agree with that, and definitely in the long run. Right, So this is what we were talking about before, where the pain of fixing our trade deals and fixing the policies that were in place prior will end. But then we're going to see this massive spike in real growth in this economy, in real growth in the market. It does not surprise me that the focus has been on
the negatives of tariffs. It does not surprise me that there's a pylon the idea that there are so many in the world, but more specifically in this country, that would rather see the negative headline and a failure on the part of the Trump administration rather than see the Trump administration because of the fact that it's President Trump's administration succeed is a said commentary on where we stand
as a nation. If this were flipped and it was the Harris administration creating all this turmoil, but working towards what they say is a better economy and more productive growth and fairer trade deals, we would see complaints, but we would not be seeing such lopsided reporting on what's
going on. Again, there's a bigger picture here, and I give President Trump a lot of credit for ignoring a lot of the noise and grinding through, because at the end of the day, they are reporting negatively on everything that's going on, and we don't.
See the positive reports that are there.
What will end up nipping them in the butt, as it always does, is when the tide goes out and we see what's really there, we will be in a better position. GDP growth will be stronger, the dollar will be stronger, the markets will be healthier, and employment numbers will be better. And this is why the country voted for President Trump and brought him back into office. The negative reporting, I can go one further for you. The negative reporting just on Tesla's earnings alone was absolutely insane,
even from Wall Street analysts calling for the company. Now, all of a sudden, Tesla is they're in a make or break spot. There are red flags everywhere. This is a reb old story, a rebuilt story. This is a company that made nineteen billion dollars in the first quarter. This is a company they're the only fully US made car company in the world. Premiere technology, premiere electric vehicle. Five years ago, Elon Musk was going to put civilization
on Mars. He was the darling of the left and then came out and said, hey, I believe in free speech, I believe in the Constitution, I believe in a strong border, and I'm a patriot, And all of a sudden he became the red headed stepchild. So even there, the negative coverage of Tesla by analysts that have had buy and outperform ratings for five years on the stock was so biased and so transparent it's illogical.
I just don't know what to say about it anymore. It's just noise.
Doesn't surprise me that they want everything to look bad. But at the end of the day, President Trump, the administration of doing the right things.
What struck me watching Tesla over the years, is Tesla's actually an information company with because the sheer volume of data they're generating is so enormous that as you get into artificial intelligence and you're looking for databases on which your new artificial intelligence can train itself, Testa is going to have an enormous advantage and just the sheer volume of real data about the real world because their data is not just theoretical. I don't know if that fits
at all your vision. I think of them as a very interesting and very different long term play.
I agree with you one hundred percent, and I think that's a great view and another angle to look at the company. I mean not only an information company, as you said, or a data company. But you're looking at the battery technology, You're looking at reusable renewable technology. Now, you're looking at AI robotics. Like the company is just beyond exceptional.
Now.
I don't invest here in individual names. I'm in the future space and I am macro top down, but I would say that Tesla as the street has turned negative and had been pressing the name for clearly political issues, which is insane to me. I think Tesla right now is probably at one of the most attractive levels. It's a very attractive entry level for the name, and ironically it's when the street has turned and is calling the name, you know, on the brink of extinction. It's just insane
to me. But the company has a lot going for it. And look Elon Musk, he's so highly functioning that this whole play was to pull him from Doge.
They wanted him out because they feel like he is the tip of the.
Spear in uncovering the waste, fraud and abuse. So maybe they accomplish their goals. As he announced it in the earnings culture as of May, he would be stepping back. I think he leaves a capable team in place, and I think that that's irrelevant. The company, yes, to your point, is multifaceted. There's a ton there, led by one of the all time geniuses in history.
You can't really argue that point.
People don't notice. But SpaceX continues to grow and evolve, Starlink continues to grow and become more profitable. Neuralink may have breakthroughs that are extraordinary within the next year. I tell people he's sort of a cross between Henry Ford and Thomas Edison. I mean, the sheer scale of his ability to think things through is really pretty bizarre. You don't see these things more than once or twice in a century.
Agreed.
I love the fact to that point exactly, that the analysts are saying, well, he's taking too much time on Doge, he's not paying attention to Tesla.
He's running five five massive companies. No one has a problem with it.
But he steps into Doge and he's working with President Trump. All of a sudden, he can't do that. That one ship was one too many on the board. He's not going to be able to handle this.
In general, what are you telling your clients about the markets right now?
My clients understand that my view for the intermediate term and longer term here is that we have lower lows to make before we recover and start to move higher from our previous peak. With that said, my technical model is giving me a positive, a neutral, or a negative on all of my asset classes in the universe. The investors know that we may not be participating on these rallies as we're seeing today, but I am more inclined to be selling my negative calls because that's the greater.
Move for me. These moves will reverse quickly.
For as aggressive and attractive as they are, they will reverse quickly to the downside. So they understand that we are basically playing the market flat to short until our downside targets are achieved, and then we'll start to play
the market on the recovery. And again with that v spiked recovery, where those investments are now acknowledged and starting to take hold, I'll start to turn and I'll see my intermediate and long term signals start to flatten out and become more bullish, and then I can start playing the daily trades higher. I've been playing the market flat to short since December, and I can tell you that for the year to date, we're up going on forty
percent now, So the investors are happy. I'm happy, and I think that there's a way to make money in both directions as long as you can look at the market objectively and have a process that works, which thankfully I do. The problem that investors run into and funds run into is they're trying to manage on a fundamental model which is broken, so then they grasp at straws because there is no earnings growth. You don't know what the numbers are going to be. You don't know what
the guidances and the model falls apart. So for me, investors understand right now, I am neutral to varish. I'm not chasing these rallies. I'm a seller of these rallies. But when my model tells me, Okay, the dust is cleared and we've bottomed, and I may be in a month to a quarter behind that, I may not jump
in as soon as there's a turn. But they realize they'll start to see on the monthly quarterly statements to long exposure as this thing bottoms out and my model's telling me it's time to start to take some long exposure.
You're certainly very smart and you certainly know a man some mount about the economy. How can people get your newsletter?
So my newsletter is out at Islandcapitalinvestments dot com.
It's a free newsletter.
You can see all of my deck, my investment process, and you can sign up for free for the newsletter there. I'm also on exit at CMT Underscore Anthony, that's Charted Market Technician Underscore Anthony. I have all of my media out there. I have the podcast out there with Ejantoni Policy and profits. The newsletters posted every morning and then as I see something during the day, I may throw something out just to give a heads up, but I'm definitely out there. The information is free. I like to
share that information and be open with it. I'm actually, mister Speaker going through a cap raise effort now and a restructuring of the fund, so hopefully in the next three to four months, I'll be launched in a different form, potentially with a different name, but it'll all flow back towards Island Capital Investments DO and at CMT Underscore.
Anthony, I must say this has been very impressive. I mean, I really appreciate your knowledge of the market and your candor and the model that you use. I want to thank you for joining me. I do encourage our listeners to check out your website at Islandcapitlinvestments dot com, which I'll tell you flatly I am going to sign up for this afternoon because I very much agree with your general approach to the economy and thank you for joining us.
Thank you for having me as an absolute pleasure.
Thank you to my guest, Anthony Esposito. You can get a link to his company website, Islandcapital investments on our show page at newtsworld dot com. Newsworld is produced by Gaglish three sixty and iHeartMedia. Our executive producer is Guarnsey Sloan. Our researcher is Rachel Peterson. The artwork for the show was created by Steve Penley. Special thanks to the team
at Ginglishtree sixty. If you've been enjoying new World, I hope you'll go to Apple Podcast and both rate us with five stars and give us a review so others can learn what it's all about. Right now, listeners of Newtsworld can sign up for my three free weekly columns at gingrichree sixty dot com slash newsletter. I'm newt Gingrich. This is Newtsworld.