All right, David Servant is the founder of Pinebrook Capital. Thanks so much for joining me today. I've been watching your content for six months or so, let's say, and boy, I was just amazed how you stood in the face of almost everybody with the contrary intake and it turned out to be right, and you sort of had this unorthodox way that you look at the markets. So anyway, I appreciate you taking the time to come on and speak to me today.
Thank you having me happy to be here.
So, David, the first thing, I guess we'll just dump right into I want to talk about, you know, what you're looking at, indicators, levels, charts, things like that, your unorthodox approach to the markets, why you're sort of this contraryan and you seem very confident in your opinions. I
like that. And then we're going to talk about it in light kind of what you think and what you're watching for twenty twenty four, and then kind of specifically when we look at, you know, huge debt that we're having, deficits spending two in an election year, which I think is something to be paytitents do. And then in light of war. So those are the topics we're in discuss and dive into. Before we do that, let's just maybe
start at the top. And one of the questions that I've been asking is Mark Twain said, it's not the things that we know for certain, or it's not the things that we don't know. They get us in trouble to things that we know absolutely for certain. And what I saw for the last year and a half or two years was everybody saying, as soon as the FED raises the risk free rate, stocks have to reprice lower.
They have to. They have to, they have to. They also said, when mortgage rates go from two and a half to eight percent, home prices have to have to have to. When neither of those things happened, they didn't have to obviously, right, So I don't know, do you want to start and tell me why they didn't crash?
Sure? So I think we you know these things. We take things that have historically happened and project them into the future without really understanding why. So a good example that you just mentioned was the housing market. Right, everyone said, you know, your mortgage rates went up, home priced home sales, especially for the existing home sales pretty much frozen their tracks.
Nothing happened people stopped buying houses. There was new home sales were somewhat okay because of the you know, the rape buydowns that some of the bigger builders were able to offer. But for the most part, you know, the the housing market didn't tank the economy. And what curious is that in seven out of the most eleven, seven out of eleven post war recessions have originated in the
housing market. It's the most cyclically sensitive, volatile part of the economy, and that's always that's typically been ground zero for a recession. But the question, the reason, I'm sorry, the no one really bothered to ask why, and the why really matters. What matters is housing employment and unit construction. And with the pandemic, unit construction kept on going. Housing employment.
We didn't get an extinction event, an employment extinction event that would take down, you know, translate and take down the rest of the economy. So while everyone scratching their heads about, you know, oh my god, sales have dried up, mortgage rates are high, and it's the end of the world, the real economy what matters for GDP Accounting kept on keeping on, it did find and in November of twenty twenty two, recognizing that, I pivoted and said, look, without
these with this, what really matters. Turning over what doesn't matter is not going to have an impact. What doesn't matter is sales. Sales does nothing for the real economy. Housing employment and unit construction spending that does a lot for the real economy, and that never turned over. So I think, you know, what's the takeaway is you've got to get into the nuts and bolts of causality, empirical causality, following the chain of events into what may or may
not happen. And that's that's a great example right there.
So we saw that evidence, like in the home builder stocks stayed up pretty strong, and the construction industry overall, I guess you're saying, remained strong. So even though the sales of units went down, the industry itself, is that what you're saying, The industry is that right strong.
That's right, And there's a lot there's a lot of and then you peel back the onion and go a little deeper. There's a lot of reasons why that's the case. You know. One of the reasons is employment, housing construction. Employment is that secular lows and in other words, there's just not enough bodies out there with hammers, so effectively, there's no one left to fire. You know, there's a shortage of construction workers. And you can, you know, pull your hair out as to why that may be the case,
but it's just it is the case. Red secular lows and housing employment trends, so you know, without anyone to fire, you're not going to get that employment extinction event. And the other thing that does is it takes it It stretches lead times for construction projects. In other words, what I can't recall the numbers offhand, but typically it takes a certain amount of time to build a house. Well over the past two decades, those lead times have increased,
right because there's not enough people to build them. So the things that the things within housing that typically took down or spread to the rest of the economy just weren't present to have that effect.
Good good point. Two thousand and eight. My story as I got taken down in two thousand and eight here in southern California, sort of ground zero in my area here in southern California, we saw prices drop sixty percent Orange County, California. I was sort of the epicenter of the mortgage boom, if you will. Almost everybody, everybody I knew was in the mortgage industry and it was hit extremely hard. And yeah, today we don't see any of that.
And my friends that are still in the housing and construction industry, I mean, they're still not able to find workers. To your point, they can't keep somebody there no matter what they do.
You know, another thing too, there's there's been a huge consolidation in the market. You know, I forgot what the exact number is, but you know, the big, the big home builders control around eighty percent of the new construction. So what does that mean. It means they have access to capital markets. It means they have a lot more
buying power. So the industry itself has changed. You know, before the old you know the old you know the model of a builder and his friends, you know, turning over two or three houses a year, That is kind of a dying part of the business model. Now it's consolidated. These players are bigger, the more agile, they were able to do things like the rate bydowns that we saw that would have happened ten years ago.
That's a big piece and that's sort of my thesis is the way that the central banks interact in the markets today has changed. It really changed in two thousand and eight. It's escalated and it's a lot different today. And you're saying even the sort of similar the way that the big home builders interacting the markets has changed, which obviously makes them be able to sort of handle these situations a little bit differently.
And there's also that's a segue just you know, segues into another thing too, the bank regulations. After two thousand and eight, you know, the regulatory bodies had a never again, we're never gonna let this happen again. We're never gonna let the economy get over at skis over leverage and take down to the entire economy, and it was an existential moment for the economy. And the banks have been neutered, so even if you you know, the wildcatter days are
kind of over. So that's another element where you know, the leverage appetite for risk isn't there, or maybe it's there, but it's been neutered by regulatory reforms. So that was another element where the industry didn't have that overbuilding that it was more familiar with prior cycles.
And a lot of it is sort of the general's fighting the last war, so to speak. And so I think you said seven of the last eleven turndowns were driven by mortgage. Obviously two thousand and eight still PTSD on everybody's mind from that, and so you know, everyone's fighting that last war, so to speak, thinking that's going to lead the market. But that's not necessarily the case.
That's right, and with fighting the last war, then you end up with perverse outcomes. Now we have the opposite problem we had in two thousand and eight. Instead of overbuilding, now we have aationwide secular housing shortage. So you know, we fought the last war and now we're creating new problems for ourselves.
Yeah, now let's jump into the market. So then I don't know, we want to talk markets or economy, but you know there's no shortage. I don't want to call him out by name. We'll call it Harry Dent Junior. Every year he's called him for a ninety percent crash. His data is great. I mean, I've read five of his books. I think his data is right. His assumptions
on the data have obviously proven to be wrong. A ninety percent crash in June and then in July and then November, and you were kind of standing firm and saying, no, it's not going to, it's not going to, it's not going to. Why is that? What were you looking at that was sort of giving you that different picture.
Well, first of all, the housing market was was central to that thesis. And second of all, you know, I think at the bond market. You know, if you look at bond market, you know, break events and five year five or forward expectations, they never really unanchored the bond market kind of said was able to see the inflation.
So as long as the bond market, you know, had its retained its confidence in fret and fed credibility to bring down the inflation, and as long as the bond market more or less agreed that, you know, this was a supply chain driven shock, that the bond market was not going to fall apart and the inflation would eventually turn into disinflation. And that's exactly what happened. We started seeing disinflation really kick in June of twenty twenty three, and it went to high gear in Q four this year.
So what was different It was the bond market, the bond market never really freaked out. I mean, there was some spasms and we know, some term premiums blew out, I'm sorry, contracted, and you know.
There was some dysfunction. We saw a few, you know, we saw.
Some starting with starting with the bank, starting with the banks. In March of twenty twenty three, Sure there was a mini banking crisis and a pretty favorable, robust policy response, but you know, growth, the growth, it didn't really affect the growth impulse. In fact, we had some stunning growth. You know, people were calling for a recession in twenty three, everyone was sure about it, and back in two thousand and I'm sorry, back in February of twenty three, this
is on Twitter. I came out and said, look, as long as things get less bad, the economy is going to be doing fine. Because despite all the muck that was throwing at the economy, we were still at you know, very very low but still positive growth. And all these headwinds were basically dead weight and the economy proved to
be resilient. And there's many reasons for that. There is, you know, all the stimulus spending, but you know, supply chains started coming back online stimulus spending got us through you know, the quote unquote of the dark times. And I called out a growth impulse back in February of twenty three, and lo and behold, Q two came in at a high two handle. Q three was on fire, came in
at I believe five point two percent. So I think listening to the bond market, paying attention to what really matters and what doesn't matter, is kind of key to my process.
Now, the market responded, the economy we're talking about the economy specifically here coming back with strong growth. But what about the consumer that is, savings are dwindling, and consumer debt is skyrocketing, cost of living is going up, standard of living is going down at the same time. I mean, how do you look at that.
These are all valid points, and there's you know, there's pockets of you know, strengths, and there's pockets of weakness. But for the purposes of the overall macary economy and for purpose of markets, it doesn't matter. It really doesn't matter. I mean, I remember that last year too. Those I'll talk about the this, you know, student loans after I guess there was some forbearance and once that forbearance expired, then there's gonna be a kind of this huge wall
of debt. It's going to hit consumers, and it didn't matter. And the way the way I approach all these questions is take whatever doom story you're thinking about it, divide it by the size of the knowledge of nominal GDP. It's about twenty eight trillion dollars, and you typically get a really really really small number with a lot of far you know, far right the tow of zeros to the right of the decimal point. So I think when you contextualize things like this, it really it doesn't matter.
This is a massive, massive economy. It's not going to be taken down by you know, a relatively small thing. I mean, these things obviously affect people's lives, affect people standards, individual standards of living, but for purposes of the macro economy, which is my area of focus, it doesn't matter.
That's a really good point. So within the economy, there are certainly groups of people that are being affected. So if you want to dive into it, you can see that certainly some people are dealing with the volatility, and a lot of people are affected. But when you look at the whole then it's more bullish. So it kind of depends on where you're at, but as a whole, it's good.
Correct me. As a whole, we've created over two point five million jobs in the past few years. I mean, that's bonkers. That is crazy. I mean, and you can say it's because the stimulus is fine, it's fake. Fine, you say whatever you want. But the number is the number, and that's what you got to pay attention to.
Even though a lot of those are two jobs, the second jobs.
Look, that's that that that those individual hardships are are kind of a policy question. But for people in the markets that want to make money, that's what they need to focus on.
Good. Okay, now do you.
Think I'm sorry, I'm sorry if that sounds harsh. I mean, I'm you know, I didn't grow up rich. I I went to public schools all my life. I know, I know, I know, you know, I've I've experienced different I've had many different experiences in my life. I'm not trying to be callous to the human element of it. I'm just saying for purposes of markets, yeah, that should be the focus.
Yeah, and I'll to speak into that human element of it just for a second, I mean, if you're one of these people that might have not liked what David just said, and hey, that doesn't help me, you know, I'm affected by that. The hope is that well, lots of the market and economy still doing very well. And you're not a tree. You can move and so you could learn a new skill, you can move into a part of the market that is in demand, that is growing.
And so while whatever corner of the market or economy you may be in that that's affected, there's lots of other corners and areas in the economy and market that are doing well well.
And we see it in you know, one really one of the best things about this labor market recovery is that we've seen labor market dynamics that we haven't seen in generations. African American employment is at levels that we haven't seen in fifty years. People that were at the margins of the labor force, people with you know, mild disabilities that maybe were not deemed to be socially appropriate for a job environment. Now suddenly they have access to jobs.
People with petty criminal records that were you know, because maybe they smoked a joint and high school or in college and got nailed for it or got a DUI when they're eighteen, But now they're thirty five and they're trying to support a family. You know, they were hard to employ because they had a felony record. Now that stuff is being looked over, So you know, the human element. I think, you know, a rising tide does lift all boats eventually, maybe you know, again, not at the same rate.
Now everybody benefits at the same time. But this economy, this recovery, has helped a lot of people that were previously on the margins of the labor force.
Now in your work at Pinebrook Cap it's a substack. We'll link to it down below. I follow it. Like I said, you kind of stood in the face of the general consensus, if you will, sort of as this contry and the market's not going to crash. You started to I think it seems like maybe you're starting to change your view a little bit. You've kind of been reporting that maybe the Fed's job of cooling inflation has maybe gotten in front of them, and so maybe they
wanted to cool it. Maybe it's cooling too asked, which is part of why I think you were calling for the pivot. You know, coming a little bit sooner. And now it looks like some of the data that you're looking at might be saying that maybe they've gone too far, too fast, and this disinflation might be catching them off guard. I don't know if I'm summarizing.
That right, No, I think that's right. I think, you know, if we go back to the premise that a lot of the you know, look there was the inflation is a very complex subject. You know, to this day, we still don't have a true working theory of inflation. And that's you know, that's everyone knows this. Everyone at the FED knows this. You know. It's it's not like, you know, it's not like a machine that we can totally understand.
We have ideas, we have approximations, but no one really has a real working theory of inflation.
So we're kind of making I buy into the Austrian school economics theory of in place and being a monetary phenomenon.
But anyway, so, yeah, so so now that we've kind of realized that, look, you know, roughly around eighty percent of the inflation that we saw was supply chain driven. Maybe we over maybe they were over hiked, you know, and and the FED kind of put themselves in this position, right because they were related to the trade, and you know, when they call it transitory even and it wasn't transitory, they had egg on their face. So now they had like this oh crap moment of oh my god, we're
behind the curve and we better get after it. And we see that with you know, they started with twenty five basis point hikes, twenty five, then they went to fifty, and then they're like, we need to do seventy five, and they went guns and blazing. So I think by the time they were at at a point where they were hitting, they were, you know, baking seventy five basis
point increases. By then, you know, if you subscribe to the idea of you know, long and variable lags, I kind of do kind of I have do have, don't. But by by the time they were doing seventy five, you know, they were there. They were just getting getting too aggressive. At that point. I mentioned earlier in the show that disinflation really started in June of twenty three. Well guess what, we got a signified basis point hike
in July. So right there you have this wedge is asymmetry of the disinflation has already started, but we're still hiking. And that's only you know, seven months ago. So the idea that we went may have gone too far. Obviously we will only know that in hindsight, but we're getting clues that that has been the case right where now we're undershooting the fed's target for twenty twenty three. The FED had a target of three core PC of three
point seven. We're undershooting. We undershot that. So by definition, if you've undershot it, that means you applied the brakes too hard. Think of a moving car. You got your approaching a stoplight. You want to nail the stop more or less appropriately. But if you had to shoot the stoplight by by one hundred meters, you've either put the brakes on too long, too hard, or both. And that's effectively what happened in twenty three. In twenty three, we see it already, and we're seeing it more as as
the data comes in. So the way it's looking now, the piece the Summary of Economic Productions, the FES looking at a PC of two point four for twenty four. The end of twenty four, we're probably gonna hit that mid June and that's why, you know, the fixed income market, the short end of the curve is being so aggressively bid because the market is seeing that, holy crap, we're gonna unershoot the red light. We're not We're gonna we're not gonna h stop you know, three feet before the
red light. We're gonna stop a thousand feet before the red light.
Yeah. So one of the big, maybe the big drivers of this to me, seems to just be looking at sort of the natural constraints that are there, the amount of government debt that we have, and not just really the debt, but really the deficit and the continuing adding of the debt that's that's going there. I mean, we're having you know, the largest deficits spinning that we've seen in any war, but you know, even even higher than COVID.
This spinding never sort of came down that deficit spending seems to be in an area what we'll call fiscal dominance, I mean, pushing the markets, if you will, and sort of there's this provlaile rock and a hard place where they're fighting inflation, but at the same time they don't want this disinflation or deflation that we're seeing there. How do you see them navigating this in light of being
an electioneer? I think maybe one president income and president during an electioneer and a recession has ever won reelection, and so you would think if there's anything the Democratic Party could do to stay in power and keep the economy going, they would do that. So how do you think they manage this election and this debt deficit spending and sort of what is this tug of war that we see in the economy in the markets this year.
Honestly, for now, they don't care. I think this morning I just heard that they don't care.
What about inflation or about.
About the death set. The depth isn't in an election year, it's not. It's a non for us. It might be an issue, but I think for policymakers, for people, you know, making the rules, not really consideration why they want to get elected. Both parties want to get elected, right, so they're gonna they're gonna spend, and they're spending. This morning, I just I think I read a blurb of that some R and D and some business property expenses are going to be be allowed for you know, instant depreciation,
expanding the child tax credit. Again, we can argue to it. We're blue in the face where that's good or bad, But the fact is they're doing it, and that's what matters for markets. So I think with that kind of spending, you know, it's going to be hard to get a recession this year when the government can you know, the twenty twenty four is going to the budget's looking bigger than twenty twenty three.
Yeah, I love, I love your viewpoint on this and something I say quite often, which is we have to take the market as it is, not as we want to be or we think it should be, but as it is. And so you're like, wait, we could argue these whether these are good or bad policies, and that's fine, but like the data is the data, right, right?
I mean, these are these are you know, ultimately they're philosophical questions, but they're they're electoral questions. There are questions of national priorities, what's important, what's not. We should have this debate. But as an effect as it matters to markets, I think I think that's the If you start projecting politics in the market, you're just gonna get wrecked.
I think, uh, except for I mean, you do sort of want to think about the politics and what they may do. I mean, if you're trying to sort of guess into the future, right, so it's like, hey, the politics is they want to get elected, so they're going to continue to do deficit spending, and so we kind of have to anticipate that versus going, well, no, they're going to run on a ballot of austerity and they're going to cut the spending. Right, So you do kind of have to run the politics a No.
I think that's right because we saw with you know, a lot of the IRA spending the ironically they call it that Inflation Reduction Act, but that targeted a lot of you know, a lot of spending. So you know, if you're if you're a market participant, you want to get in front of that, find out where's that? Where's that money? Follow the money, as they say, right, where's that? You know this is this is trillions and trillions of
dollars going into different sections of the economy. And if you can get in front of that, sure there's a buck to be vein.
Yeah. So in an electioneer both parties want to get elected and they don't really care about the defast it anymore. I almost seems like I mean, at this point, the deficit and the debt are just so big that like everybody just doesn't even care about it. I mean, it just seems like we're at that pace at that point anymore. It's such a big number, like thirty four trillion now we've surpassed, Like we're never going to pay that back. Yeah, well,
I guess we'll just kind of forget about it. And what does it even mean at this point?
Well, I mean, let's look at history. We know, we had look at World War Two as as a president, where we had massive debt I think nationwide, you know, economy wide, meaning private debt as well as public debt. You know, we're right over two hundred percent GDP, and we managed to work our way through that to much lower levels by the sixties and seventies, and debt really didn't start picking up again until the eighties. But my point is governments have a unique ability, especially a government
that is the issuer of the global reserve currency. They've got a lot more runaway than we think. They're not like a household. The rules that apply to me and you do not apply to governments. Why you and I have a natural life spent we will die. We need to satisfy our obligations before we die. Governments until unless they're defeated in a warrant taken over, they live in perpetuity, so they can ride out. They can basically deflate and
ride out you know, debt. Right in other words, when the country was newly formed and needs any you know, a ten million dollars bond issue and so it's massive back then. Now I mean it's it's a drop in the buckets. And these numbers kind of deflate over time. So governments have a unique ability, especially again we print our own our own currency. We we can ride out these bumps. And not only that, you know, because we're the world's largest reserve where the reserve the reserve currency
of the world. You know, money pours in here. Why because we have the biggest, deepest liquid, most liquid capital markets in the world every country. You know, we we rent current account deficits, we we we we buy more then we sell. But you know, we seem to be able to give in foreign investors a good return on their capital. And you know that that party can go on as long as we give foreign investors to get
return on their capital. And you see it with stock markets where you know, em valuations European valuations are at a discount compared to the US. Why because we just have better companies, better institutions, and better returns.
Although we have seen the last couple of treasury auctions have some pretty big tails and some dysfunction there. And it looks like when I've looked at the data, like the foreign demand is still there. It's just the treasure is just issuing more supply than there is demand for that. So at some point there is some sort of a limit there. Obviously until you can start, you know, forced to by by yourself, I suppose, I mean, don't you take that into some consideration.
Absolutely, but it's not. It probably won't happen in our lifetime. It's just the number the capacity for debt is staggering. Think about it. We are at I think you mentioned you're right, I think you're thirty two trillion dollars in federal debt. So that's a little more over one hundred percent, you know, if we can get you know, during World War Two we managed over orders of magnitude above that.
So that's just as a percentage as a percentage, correct.
That is a staggering amount of money for the government to spend that. Maybe they can spend that in our lifetime, but it's a huge runaway that I think most people find hard to fathom. I mean I find it hard to fathom. And this is kind of what I look at a lot. Yeah, will there be a dec day of reckoning. There always is, but it's just a question as well i'd be around to see it. Yeah, highly enlightening my life.
Well, it's a law of the way that I see. It is sort of the law of diminishing returns. And you know, you have this Kinsian multiplier, if you will. So they're using debt to get growth, but eventually you don't get enough growth for the debt that you're consuming, and then eventually you're getting more debt. The hole is getting digger deeper, right, So you're getting more debt than you're getting growth, and then sort of that collapses. I mean, it happens to all nations.
We've seen it.
I see it having all around the world.
I agree one hundred percent. I think that the trump card at this car that this country holds though, and that we're not leveraging is immigration. People still want to come to this country. And if you look at every developed nation and even under development or developing nation, they have really bad demographics. You know. If you look at you know, Japan, you know they're just they're they're you know, China,
There're gonna below replacement rates at some point. People still want to come here, people will still die to get here. And I think if we can you know, GDP is basically two things. It's population growth and productivity growth. So you know, all we need to do is you know, I had out some green cards. And this may not be politically uh, you know, appealing to a lot of people, but from an economic standpoint, the GDP calculation is very simple.
It's people and productivity. So if you grow your people, you're going to grow your you grow your economy, and you grow your way out of debt. If you have pred activity to that, things like AI or whatever. I'm not sure how much of an impact is gonna have. There's a lot of hype, I'm sure, but there's a lot of you know, productivity that if you exploit that then it's like a superpower. And I think I'm very boolish long term in this for this country.
Okay, so the massive amounts of debt. They're not worried about that right now in an election year, the goal is to continue to keep a recession at bay, and your sort of outlook is they'll probably be pretty successful with doing that, I think.
So. I mean, I'm a I'm a small time investor, so you know, I'm I'm the I'm the pimple on the elephants, but the elephant being the Fed and policymakers, and they will make the rules. My best bet is not to fight them. It's to find out where it's going and just you know, enjoy the party.
Yeah, now, what about there's any number of black Swans or gray Swans, because we know about them, that we could we could discuss. But what about the war and the risks of the wars and escalating wars things like that. So right now we're seeing you know, the attacks happening in the Suez Canal. We see car transit cargo going through is down almost forty percent in just the last couple of weeks. Ships are having to be rerouted. You know, YadA YadA, yah. We can go on at less trips,
more costs, higher inflation, et cetera. And this is just a small piece I mean, if it continues to escalate, what does that do to oil, to you know, supply chains just in general. And we don't need to get into the details of each one of those, but I mean, is that a potential wrench that could be thrown into the spokes of sort of the economy and this inflation dynamic this year.
Yeah, if we have a serious supply chain interruption, we could you know, go back to twenty twenty twenty one. It depends on the severity of it and the escalation. So I think it's an everyone's interest to de escalate. But there's no doubt. You know. Look, you know, you know what happened with Russia and Ukraine. You know, it was kind of you know back then, it was like it'll get resolved and really quick, and all of a
sudden it turned into this massive supply chain shock. You know, everything from energy Europe, fertilizer, food, you know, so these things can have huge ramifications, and I think need to pay attention to these things now. I think it's an everyone's interest to de escalate. Hopefully there's successful at it. War's never in anyone's interest, but unfortunately it happens now.
I mean, that's a pretty good sort of proxy to look at, sort of the rush of Ukraine situation. So when that happened, it didn't crash the markets. We did see supply chain shocks. We did see the price of gold and oil go through the roof. So it sort of drove asset prices higher, commodity price is higher, and even the cost of goods higher because of the supply chain. So that was sort of an inflationary impulse that happened.
It was not a deflationary impulse. So is that sort of what you think may happen If if this were to escalate and get worse, it'd probably be more of an inflationary impulse to the economy than a deflationary one.
I think so, because you know, you have you have oil in there. I mean oil is oil is really you know, there's some people, some people have a theory and I'm sympathetic to it that inflation really is an oil phenomena and energy or energy rather and energy really is at the heart of inflation. So people think of that.
I know, you're an Austriten. That's fine. I respect that, But you know, in any case, I think there's no question that the you know, energy shock would be you know, it could be it could be a disaster for the economy. It could be really bad. And that's what's kind of like the one thing we really want to avoid. That's that's the that's we don't want to go there.
Yeah, do you do you? I don't know. I haven't seen you talk a lot about oil and energy and your research, so I'm not sure how first you are. But it is seemingly sort of a little bit interesting right now seeing this traffic whatever's happened in the Middle
East wherever you want to call it. I don't know if it's officially declared as a war or whatever, but whatever's going on there, Plus with the shipping delays through the sous Canal, et cetera, and we're seeing the price of oil still continuing in to fall, which is pretty interesting. You would think just from that alone, it would be
pushing the price up. I don't know if you have an opinion on that, And do you think it's potentially you know, the economy, the global economy is slowing enough to sort of offset that supply demand imbalance that's being pushed there.
I think that's one thing that's really interesting is that the United States is now the largest largest oil supplier producer in the world. That is crazy. I mean, we don't think about that that you know, all we think about in Saudi Arabia and the Middle East. But now we are the world's biggest oil producer. That is bonkers. And I think that's I think that's the offset to what's happening in the Middle East.
So that is sort of sort of kind of keeping the price down. Even though there are some supply chain shortages happening over the Middle East, the US is sort of picking up the slack in that.
Sure, yeah, we're able to do that.
We know.
One other area of concern, the possible black swan that not a lot of people are talking about, is Panama Canal. So there's a drought in Panama. The for to operate the canal locks, they have to pump into water from the nearby lake. That lake is you know, getting pretty bone dry, and now they're starting to put limits on
traffic going through the Panama Canal. So, you know, I don't know to the extent or the impact, but I think that's going to keep an eye on if if someone is really concerned, if one is really concerned about possible future supply change shocks. Have a look at the Panama Canal.
Yeah, yeah, I mean it's the same thing. I mean then you would have to basically reroute ships around Cape Horn as opposed to Cape Good Hope and to add delays, add costs, add things like that.
So that's right.
What about all the what about all the people pointing to the yield curve inversion and one hundred percent accuracy and pointing to a recession and it's going to be uninverting and it's guaranteed doom and gloom because one hundred percent as that uninverts, that there's a massive recession coming.
Yeah, So the yield curves I think is important. But I think what people can inflate is the ConFlat for being a coincident indicator and having predictive power. What they'll curve tells us, the ill curve inversion tells us is inflation is higher today than it will be tomorrow, and therefore short rates are higher today than they will be tomorrow. That's all. That's all. That's what it's telling us today. It can't it doesn't tell us that a recession is coming.
It's been coincident. It's kind of it happens as a part of that, but it's not. It doesn't cause the recession itself. How do we know this, Well, this is the exception this cycle, right, The you'll care first inverted in October of twenty twenty two three. And to be clear, I'm talking about not two tens. I'm talking about three month tenure that spreads the gold standard for an inversion, and that inverted in October twenty two. Classic theory tells
us it's twelve to eighteen months. We're on month fifteen. Now, chances of us getting recession the next two to three months is pretty low. I mean, it's recession was always there, but you know it's not happening. Why is that? There are many answers. I don't know them all, but I think what's happening flies in the face of what we were told is supposed to happen. So the yield curve is I don't think is predictive. I think it's coincident. It just tells us what's happening today.
I think some of it too, kind of going back to a point I made earlier about the way the central banks interact in the Market's changed in two thousand and eight with the launch of QE, and it seems it's only escalated since then. And now instead of the FED being sort of this reactionary machine, now they're sort of preemptively moving. So if you look at like two thousand and eight, it took seven months from bear Stearn's collapse till the the FED got about one hundred and
fifteen billion into the market in twenty twenty three. Who saw it in six days, right, Yeah, And so that just showed short to shoo the size and the speed of these moves. In twenty twenty, I think they set up like thirteen SPV you know, funding facilities in a matter of months, including buying equities, you know, basically in the market. We've never seen that before, and so you
sort of look at that. And so then going back to this yield curve, typically showing that rates will be lower in the future means that, well, there must be some big recession coming that would cause them to lower rates.
I don't know, this is kind of my thinking about it. Yea, yeah, but what we're seeing now is well, they are cutting rates and there is no big recession, and so in the past they've sort of started cutting rates and then people would say, well, it's when it uninverts then it causes the crash, or when they when they pivot, it caused the crash. But I think to your point, that's not the cause. It was what was it was in common and so the FED was late to reacting. The
markets were already crashing when they made the pivot. But in this case, they're making the pivot early.
Well that you're I think you're right, and I think they they're they're preemptive. In other words, typically what would have happened in twenty three with those banks going down, they would have shut the banks down, you know, the problem banks twenty three, and but the fallout the model that the transmission would have kept on going and the negative transmission, and we saw in twenty three was that negative feedback loop was short circuited by by by policy.
Whatever they did, they stopped the you know, they stopped the contagion from spreading. They front run that and got ahead of it. And so credit continued to flow. The economy was never starved with credit. People still had access to credit, corporations still had acces to corporate to credit. High yield bond spreads continued to come down, and so you know, the FED was able to front run that, and the yield curb version had nothing to do with that.
It was just policy being preemptive and of what are the problems of the past.
Yeah. Now I love how, you know we talked earlier, sort of your ear your take on the market, the way you look at them, watch them, read them, et cetera. A little bit different. It seems to be a lot more data driven. And as we kind of said earlier, it's not as you think it should be, your philosophically want it to be, but as it is, so all of this could change at any moment, and you're sort of watching the data, right and I'm guessing, or I
guess I'm curious, Like what are you watching? You know, your charts to indicators you think are probably the most important to kind of sniff out when you should start to change your mind.
Yeah. So, in terms of conventional charts, I look at the labor market. I'm kind of obsessed with the labor market, So I look at weekly job, the weekly job claims, the continuing claims, the four week moving average of continuing claims. Those are a big tell on on the cycle. Once you start you know, once you start losing the labor markets, it's kind of like an emergency and it's pretty soon
game over. So throughout this whole cycle, what we've seen is those numbers improve even in the face of other shocks, the labor market kept on improving. So you don't get a recession when people are still working. As long as people wake up in the morning, go to work, earn a paycheck, spend it, the economies and to keep on going. And so that is really really important to me, the labor market.
But isn't that somewhat of a lagging indicator unemployment. I mean, typically businesses are going to go through a whole lot of hardship before they start to lay off employees.
The answer is yes and no. It's lagging in the sense of it's the last thing to go. But if you as long as it as long as it you know, is resilient, you're not going to knock the economy over. So I guess if you want to say, oh my god, you know it's labor market softening up, We're to have a recession tomorrow, I guess in that way, it could be leading right it It gives you a talent what's going to be happening in the market. So maybe it's
the last thing to go. But since it's the last thing to go, that's when you really have to start worrying. I know, it's I know, it's kind of counterintuitive in that way. It's kind of like, I don't know, I'm trying to draw an analogy. I don't I'm getting I'm getting old. So once once I start, once I start losing my hair, and then should I really really worry about getting old till then looking great? Right? So it's it's it's kind of a it's a counterintuve approach that I take at least.
Yeah, what about the Fed's numbers, the probably not CPI maybe PCE. I mean, what about those into type of indicators.
Yeah, so I look at I really look at the the s c P, the Statement of Summary of Economic Projections. Now, a lot of people think that the s c P are forecasts, and they say, oh, you know, inflation did this, and the FED they can't forecast for beings and they don't know what's going on. I think that's the wrong framework, the wrong approach. FED projections in the se PR statements of intent, What does that mean? It means that they are trying to use their policy powers, the levers of policy,
to guide the economy to you know, whatever target they have. Right, it's a it's an intent in other words, like when you wake up in the morning and say, God, I went on a diet and my goal is through this fifty pounds by year end. So you know, it's in a way, it's kind of a forecast. But really it's an intent that's going to guide your actions and hopefully
you get there, maybe you miss. But it's really a framework for guiding other parts of the policy apparatus, whether it's the r RP you know there, you know, all these different you know, plumbing acronyms, those things are driven by the S, by the SEP, by the statements of intent. Right, So the statement of intent creates the framework for how different policy levers are going to be pulled and manipulated to guide the economity their target. It's not a forecast, no,
no one's got a crystal ball. So I start with the with the SEP and try to understand, Okay, if this is the target, then they're going to try to do X, Y and Z to get us to that target, and that has an impact on rates, it has an impact on risk assets. So you know, a good example was we undershot PCE. So having undershot PCE, now they're going to have to take actions to kind of recalibrate their policies. And that's what that's what I use to
kind of front run where they're going to go. So the SEP for me, is a tool of getting into their thinking, not to not to make a forecast, but to get into how they're going to react to the data.
Okay, now you put on Twitter a few weeks ago or maybe a week ago, I forget, but something about I remain risk on. I think you said that, right, yep, that's your viewpoint for this year. Your remain risk on until proven otherwise, until some of these indicators you mentioned, the unemployment data or the SEP data starts to change your mind. But until then it's risk on.
Yeah. I mean, look, there's volatility, there's risk. You know, we you know, just get if we get a five percent pullback, that doesn't really change the broad thesis. It just means, you know, the market that a little ahead of itself. You know, there's always variants in markets. But I'm constructive of the economy. A recession is not my base case. I don't think we're gonna go into recession. I don't think we're gonna get an employment extinction event.
You know, obviously there's there's always those risks that we discussed earlier, right, supply chain, risk, war, these things can can always you know, we just don't know. But apps all else being equal, Uh, you know, inflation should continue to moderate or disinflate, the labor markets should remain strong, and we should not go into recession. And you know, risk it's a favorable, favorable environment for risk assets.
So so how do you play it? What? What sectors do you like the best? I mean, I think I'm an inflation bowl. I think the rest of this decade is an inflationary story. And maybe the story isn't so much how do we keep up with inflation? But how do we beat it in this type of environment? What type of sectors and assets are are you liking for this type of environment?
Yeah? So I link it to my to my policy call on what's happening with the YELD curve. So what's what's going to happen, What's going to happen? What we know is going to happen. Is the yield curve is going to disinvert. We know that's going to happen. Why do we know it's gonna happen.
You think it happens this year?
I start, it's that I think I don't know if it fully happens this year, but that's I think more likely. Yes, Okay, So the yield curves, you know, disinvert. Now what does that? That can take different forms? Could mean that could mean that two years days where it is, ten years goes higher. It could mean it could mean, you know, ten years stays where it is to your fall eels fall. Could be some combination thereof, but it will disinvert. So I think the trade is to play off that disinversion. Who
who benefits from a disinversion? Well, the easiest one is if you're borrowing short lending long right now, you're kind of screwed, right In other words, if you're if you're financing costs today are higher than what you're making on the long end, you're kind of screwed. You're not, you're upside down. However, if the yield curve disinverts, and depending on the speed, if you're in if you're in any business that borrows short lends long, you're gonna start making
more money. So classic one is and I discuss we put this trade on back in November, and I discussed it on a different podcast. Was you know the mortgage rates. You know things like anally mortgage, they basically borrow money from banks buy mortgages. So they're they're they're they're borrowing short lending long, and they've been in the toilet for a while, so lately they're up around being close to
twenty percent it's November. Why because their funding costs are going their overnight funding costs are going down, and you know they're they're buying you know, long dated paper that's going to be yielding more than what they're art costs are.
So banks, financial institutions that that sort of have these types of strategies you think will outperform.
You like that, uh correct? And also homebuilders right, and they're they're capital intensive, so they need to borrow. I mean they're borrowing the way they turn off their debts a little different. But I think between the secular wind of the housing shortage combined with the change in in in the yeld curve, they should do really well.
So companies that are cash intensive could do good because they're borrowing costs would go down, which would drive their expenses.
Down borrowing costs relative to what they're making on the other on the other side, Yes, right, Okay, doesn't really matter the level. What matters is the relative relationship between those two.
Okay, so homebuilders some financial institutions that have that and play. What do you think about commodities? Do you follow commodities much?
You know? I don't. I just and I I don't only out of ignorance. They are they are so above my above my pay grade. I do not understand them. I mean they're there. I know it's supplying demand. I can tangle and vapradation. I get these consps academically, but just as as as a as a way to approach them to make money, I would most likely lose money to make it, so I don't touch them.
Yeah, I mean, certainly the commodity itself has those attributes supply demand, if you will, which is there's a million reasons that would drive that. I was thinking about the companies themselves, the gold mining companies, the oil companies. They're very capital intensive, right, so they may be caught up in that sort of borrow along lend short sort of scenario. But okay, I just.
Don't under I don't understand. I don't get it. Unfortunately, I wish they did.
Yeah, yeah, okay, So financial stitutions, what about what about like the tech stocks and like AI you mentioned AI earlier. Do do you think of in that area that's that's certainly a risk on type of asset.
Absolutely, I think I think tech is you know, tech is. I believe it's now forty of the S and P five hundred. I mean, it's right tenth overall, and I think that that's going to keep growing and that I think those huge leverage returns, those scalable returns that you can get from technology is one of the reasons why US markets, especially at the SMP level, trade at a
premium round to other world markets. We just have best in world, best in class world, you know, world class companies, and that will I think that's gonna that's going to continue to do well.
Yeah, And what's your take with bitcoin? The ETF popped a lot of trading volume happening over there. Larry Fink seems to have really sort of turned the corner at least vocally what he's talking about on bitcoin. What's your viewpoint on that?
I I have no no view on bitcoin. I don't trade it. I mean I understand one of it's like commodities. I understand it intuitively maybe and academically, but it's I really devote my time to understanding the economy and interest rates and from their building out trades based off the interest rate movements, and that that takes up a lot of my most of my time.
Sure, sure, yeah, Warren Buffett strategy, right your deal box, stay in your area of your circle of competence, if you will.
Sure, exactly, Yeah.
All right, David well Man, that was really good. A lot of information there. I really really appreciate that. Anything else that we need to lay out there that we haven't discussed, no.
I think we covered it all, you know. I think we're looking at it at a March cut in by the Fed, and you know, we'll see how that evolves. But I think the cuts start in March.
Whether it happens in March or April, does it really matter, you know.
I think what matters more is less the timing at this point, more the degree, you know. I think if they just I think the more they forestall or kick the can on actually making the cut, the bigger the
impetus grows for a large cut. In other words, instead of starting at twenty five, if you start kicking the can un till June, now, now you're going to start cutting at fifty, right because of the disinflationary pressure is building up, So you know, to me, it's you know, you know, tomato, tomato, right, That's.
Kind of what I was thinking. That was sort of like last year, like, oh, we're gonna get one more twenty five basis point raise, and it's like does it really matter at this point? All right, and sort of kind of like that. Okay, great, well, David Savante's Pinebrook Capital. We'll link to your stuff down on the show notes down below. Anyway, thanks for joining, Thanks for.
Having me, appreciate it. Take care,