Cash Is A Decision, Not A Place To Hide

Welcome to Trader Talk. I am your host Kenny Polcari and today we've got Ben Ammons who's with us. He's the chief investment officer and founder of Fed Watch Advisors and we've got Chris Kampitsas. Is that right? Kampitsas? Yes. From Barnum Financial Group, the managing partner of Barnum Financial Group. Gentlemen, thank you very much for joining me because I'm going to join this conversation. We got about a half an hour to talk about a lot of things and there's a lot happening, right? So let's start with let's start with our idea about the latest announcement from Treasury Secretary Besant. You know, last week he kind of surprised the markets on Wednesday and said they were going to double down on the buyback and this morning there's a there's an article out about he's got potentially another hundred million dollars out of the general fund that's available to him to try to manage along into the curve. I'm not so sure he can do that. Yeah, I think, Kenny, what's what's really happening is that and this is news report actually by Yahoo. Right. That they that they build up this war chest, which is the checking account of the Treasury at the Fed. And that's nothing else than an operational account, right? Money comes in, money comes out, tax receipts versus other payments. But they want to use that amount to say guess what? We can buy some of these long-term bonds and try to bring rates a bit down. But there's no free lunch here, right? You got to replenish that cash because, you know, you cannot just keep that at zero. Right. And all and or you have to issue more bonds to finance it. But there's no free lunch. But the fact is you can't really control the Fed or the Treasury can't really control the long end of the curve. That kind of responds to market conditions. Am I right or am I wrong? Yeah, market conditions. And at the end, still the Fed that plays the biggest role. You know, if they really were to help the Treasury with this, then the impact would be significant more. Right. But controlling is still the market force itself. You know, there's six and a half trillion dollars outstanding of these 10 to 30 year bonds, which are held everywhere. Right. So so it's not that simple just to control it. And so the long end of the curve, the 10s, the 20s and the 30s are, in fact, doing a lot of the work of the Fed because rates are nothing but go up. Right. The Fed has done nothing. Rates are still three and a half, 375 in terms of Fed fund rates. Yet the long end of the curve is now I think we're I think we're in the danger zone. I don't know. Do you think we're any where do you think the danger zone is for you? I don't think we're in the danger zone. I think we're in the normal zone, which it's been a long time since we've been there. So it feels a little uncomfortable. The German vice chancellor came out this morning and he said he blames these rising government bond yields exclusively on Trump's war in Iran. And, you know, that's a bold statement to come out and say. And there's a lot of I think some of that might be true because I think some of it is nervousness. Right. That's right. So when you're dealing with that as the causation, it's hard to then manipulate it through policy moves at the Treasury. So when you say, no, you don't think we're in the danger zone, where's the danger zone for you? I think four to six percent on the Treasury and the 10 year historically is where that yield should be. But, you know, in twenty twenty six, the yield was under four at one point. It's amazing how quickly this jump has happened in such a short time. It's still a three and a half, three seventy five. And the long end of the curve has moved. It's all like Fed funds have moved up. And so the long end moves up. It hasn't right. Fed funds have stayed the same. And yet the long end is moving up. Because I think the long end is dealing with there's a massive issuance of Treasuries that is coming. There's a massive demand because of, you know, corporate demand, AI technology and all those corporate demand is coming to the market. I say that that's probably, Kenny, the biggest factor. Right. Even the Fed themselves acknowledge that hyperscaler issuance. Right. Being hedged with Treasuries explains the majority of the move that we've seen in the long end of the curve. Less so about inflation or anticipating the Fed move or even the fiscal deficit for that matter, even though it continues to be an issue. Right. So where do you think rates are going to go? Where do you think rates are going to be at the end of the year? I think it's going to be still higher. From here? From here. But here is the reason. This is the economy that's growing a lot faster than we've had in the past years. And it's going to grow even faster with all this issuance and investment coming in because a lot more coming in from here. I think that's what's really driving yields higher. So we could end up with a 10 year well over five percent in the 30 year going to five and a half or higher just because of economic growth. And do you think that provides a headwind for stocks? No, it would not. This would be the good reason. Because the economy is growing so much. Exactly. OK, second quarter GDP, the second the second round of second quarter GDP is coming out on Thursday. They say it's getting one and a half percent yet. They're already talking about third quarter being more than three percent. Do you agree? Yeah. And in fact, if you take the real time indicator from the Atlanta Fed, we're actually growing technically at six percent real GDP. Right. So adding on inflation comes out on Thursdays like around about three, three and a half. This economy is actually growing at nine percent nominal. That's right. That's why yields are going higher. Right. But that's unsustainable. I hope not, because it would be great. Sure, because then we can grow our way out. Yeah, you go way out of debt. You know, the president says he actually that's a good point he makes. To get out of debt, you should grow out of it. OK. But, you know, the challenges with Hormuz, as you were saying, like that's what's probably the biggest uncertainty of a hangover economy. The other challenge that you alluded to earlier is the mom-and-pop investor all of a sudden saying, why take this risk in equities when I can just get five and a quarter. So there's the danger. So that's that's exactly right. So what's the danger zone? Five and a half? Five and a half, it starts to become a danger zone. But I think six is the magic number where all of a sudden you say, what's the risk? Six on the 10-year is where really equities start to look a lot less appetizing. I think as long as you have a five print in front, you're still gonna see people who would prefer the volatility and the risk on. But when that edge is forward, you know, it's a challenge. So, for example, we've seen insurance companies recently offer 5.9% on a seven-year guaranteed interest contract. That's a big number on a guaranteed basis. It gets people to pause and think, is it worth it? Wait, when you say, is that an annuity? A fixed annuity contract. Those are the latest rates we've seen published. 7.9% on a fixed annuity, or 5.9% on a seven-year fixed annuity. Correct. So you're getting very close to seeing that that six in front of you. Have you seen clients pull out of stocks and move into those annuities? Not yet, but they're starting to ask the question. That's interesting, because I'm not an annuity person, but that's, yeah, it's all about the conversation. But that's, you know, that's interesting. For me, the danger zone, I think we're right at the beginning of the danger zone. I'm more in the 5% on the 10-year. I think the five, if we hit 5% in the 10-year, that it's gonna be a headwind for the market. I think you're gonna see stocks kind of struggle. I think at six, they're gonna really struggle. But I think at five, you're gonna start to see, I mean, I think you're gonna see it start to struggle at that point. Even now, if you think about this, Kenny, right, like in 1999, which is sort of a year that we're going through today with all this technology that's sort of like pushing the economy, the 10-year treasury yield ended up over 6%. And although the Fed hiked rates by three, inflation was at that time by much lower, but there was a 6% handle on the 10-year when the economy was growing at the same rate as we are today. Yeah, but that was also the beginning of the dot-com crash and bubble, right? The Nasdaq lost 60% over the next year and a half. Correct, but that was really because ultimately, the Fed pushed it too far, too much. So you're gonna have more hikes in the 2000s. At the end, they even hiked by 50 base points when the market was already turning south. Under this Fed wash, or sorry, wash Fed, it may be a little different that way, which also means that the 10-year may not reach this 6% as our economy completely gets on fire. But either way, I think your danger zone idea is about, you do hit some sort of a speed bump, call it that way, if rates are a bit too high and start to constrain the economy. Yeah, no, I agree. I think it's interesting that you've got a, you know, a 6% number on it as being your danger zone. Okay, we're gonna see what's gonna happen because I think it's gonna, I think it's at least going to five, and then I think we'll see, you know, we'll see the market back off some. I think it will certainly start to create a headwind for, especially nervous investors. Maybe not the younger set, but certainly the, you know, the set that's in the 60-70 age may get a little bit more nervous. Right, and look, I certainly think you'll see market jitters any time we hit a new threshold, right? But ultimately, the market tends to collect itself, the buyers come in, and we march towards new hikes. Tell me where you think we're going September, October, as we move into the fall and into midterms, in terms of the market volatility. So the midterms can become a tension point in markets because... Do you think? Especially this year. I think it is because, let's say that we're getting hypothetically a blue sweep of Congress. Yeah. So the Senate does flip to Democrat. Then we're getting a lot of the ideas that we currently have priced in the market being priced out. Right. On a different direction. Right. It would really turn the economy into a different direction potentially, too. Because think about AI data centers, which in the Democratic camp, there's a lot of resistance to that idea, right? So to curb that itself would curb investment, therefore bring the market down. So that's, I think, a risk there. Yeah, I think there's a risk there. But what are you saying as we move into the fall? I think if you look at echoes of 2018, I mean, this is a rare instance where we've literally played this script back once before, right? Same president, different Congress. But ultimately what ended up happening is we had a blue wave. The S&P went from being up something like plus 10 in September to finishing negative for the year. But at the end of the day, you know, the market collected itself and we had a phenomenal year in 2019. Agreed. We're in a really good time to have a lot of bad things going on. Because against the backdrop of all this geopolitical issues and bond issues, we have the expansionism of what's happening with technology. And we've had a lot of bad things go on this year. That's right. More than our fair share. There's a lot of bad stuff that they've been thrown at this market and yet we're still kissing or near kissing new eyes, right? That's right. I think the market's a little bit weaker today. And I think the market's, you know, I think the market's going to continue to struggle as we move into September. Remember, September's typically the worst month out of the year in terms of how it returns, how it trades, right? And this year, which I think is a really hot midterm, hot meaning anxious, midterm environment. I think we could see a pullback, which I wouldn't necessarily be surprised at. And I think it needs to shake the branches a little bit. I think it's so interesting when you look at how Trump ran on the economy, the economy, the economy. And then you've had these geopolitical factors come in that ultimately have derailed the potential of the economy. But the economy has been so strong that it's managed to overcome it to this point. But you feel a little bit of fatigue setting in. The six-week conflict is now an eight-month conflict with really no end in sight at the moment. That's right. Right. As of, as of, you know, the weekend this morning, it doesn't look like, doesn't look like there's any. Iran has even said that they would not open the strait until Trump is out of the office. There you go. And that they're serious about it. Yeah. Yeah. Yeah. And that's exactly right, is that they, you know, there's no reason for them to make a deal at the moment. They're going to, if they hold his feet to the fire even more, you know. But we're getting right now is that the sanctions are being announced. Right. Which could be, I looked up the sanctions that are currently in place on the Treasury website. Yeah. And a kind of little toggle on the large language model, asking it like, what can be worse here? They could do significantly more. Yeah. To paralyze the Iranian economy. Which is, I think, the announcement today, right? They're going to try to completely, completely leave them alone on this island. But there's consequences of that. Yes. Definitely towards China. Yes. Which will affect them negatively. Even Europe. And, you know, there's limits to that at some point. So that becomes a bigger problem. It becomes a bigger problem. Yeah. Right. So I think it, so that's playing into, you know, as I think about it, that's playing into kind of my sense that there's going to be, we're going to have some more volatility in the fall. You know, moving into the fall. I don't think it's going to be a disaster, but I wouldn't be surprised if we saw, you know, an 8 to 10 percent pullback from the top. Now we're already down 2 or 3 percent, I guess. So, you know. I think we're very range bound. Yeah. Until the economic indicators indicate that these symptoms have actually led to a problem. Right. And unless we get that, you know, unemployment remains relatively strong. Inflation stays in this mid threes or less kind of range. Generally speaking, you know, that's conducive to continued upward stock market movement and further economic expansion, like you referenced with GDP growth. Right. If unemployment all of a sudden starts becoming a major issue, then all of a sudden everyone's looking around, the Fed in particular, what arrows do we have in our quiver? But unemployment's at 4.1 percent according to the latest NFB report. That's about as good as it gets. That's historically low. Yeah. Right? That's not anywhere near a concern level. Right? Absolutely not. And that's why, you know, our belief is that the economy continues to move forward. Yeah. The stock market continues to hit ultimately higher highs, but it's going to be a struggle to continue because there's a lack of confidence. OK, so we're going to get PCE on Thursday, which is expected to be a shade better than last month. But that was the same for PPI and CPI, which proved to be true. Right. It was better than last month. But now the whole month of August, we've seen oil do nothing but move up from 67. It's been trading here in 80, 80 plus for most of the month. So next month, PPI and CPI, PCE are not going to show the same kind of downward trending pattern, which only then. So I think people are going to look through Thursday's number because they're already looking at the next month's number. They already recognize that it's going to be higher. I think that's right, because this CPI report actually had some surprise element in it on energy. Right. Maybe because the way it was measured, because even in July, we had a big move in energy and commodities. So we're rippling now through here. And you're right, like this all shows up in services, which PCE is a lot more about that. Yeah. And then we have the tariffs are back on. So this Canadian tariff situation, even though it's very small and will have a tiny effect, it's going to start rippling. It's going to start affecting other things. It's the impression, right? Whether or not it's small and has a tiny effect, it's just the idea that we're talking about these onerous tariffs again, right? Yeah. And even bigger ones that will maybe come in effect by January. But you know, this is a new type of tariff again. It's a smooth haley tariff that has not been used since the depression. So a different approach towards our main trading partner. All right. So tell me about the Kevin Walsh Fed. What's your opinion about the Kevin Walsh Fed in terms of how he's doing so far? It's only been, what, two or three months, I guess. But next week starts Jacksonville boondoggle, which I think is a boondoggle, right? Say for what it is. They get all these global central bankers come to town. And I think this month, this year, they're talking about payments and processing. So they're not even talking monetary policy. So I don't think you're getting anything out of Kevin Walsh. It's going to be interesting. I think he's speaking on Friday. And is he going to talk about the moves that the treasury secretary has made and announced? Or is he going to basically ignore it altogether? And so what do you think? I think in all likelihood, he ignores it. Yeah. I don't think he's going to go down that road. In fact, actually, this payments topic, he has spoken very specifically about it, tokenization, digital payments. And it's a nice excuse to not talk about anything else. I agree. And listen, and it would go right down kind of what he's said from the beginning. He thinks less is more in terms of what the Fed is thinking. So I think the last thing he's going to do is get out in Jackson Hole and start talking about monetary policy in the U.S. when he specifically said, I'm not going there, right? I don't want to go there. So anyone who I think was looking for him to say that is going to be sorely disappointed, I think. But I don't think the market's going to react to that anyway. Unlikely. I mean, unless he's surprised, obviously. But he's definitely, as you write, he's not in the camp of the policy signal that Bernanke or Powell or even Yellen has done in the past or Draghi when they used this platform to signal policy, which was an important signal at that time that they said it. He doesn't have a reason, actually, to signal anything. Right. Even if those yields are higher and what the treasury is doing, he wants to stay far away from that anyway. So he's not going to signal anything that there's anything material to signal about. Right. There's an economy that has not accelerating inflation. Growth is really good and employment, as you say, is low. So the mandate is relatively imbalanced with some restriction here on housing. So what is he really going to say? The speech you're going to open with the economy as a description of the economy, perhaps, which you could pluck a little bit from it. And then he goes into that whole digital payment discussion. Right. And so therefore, I think he avoids any conversation about about kind of monetary policy. You know, what's interesting in the Fed minutes that we got a week ago, a week and a half ago, besides the three dissenters, which were very clear, we knew there were three dissenters, there were more leaning, more hawkish. That's right. I mean, they ultimately voted no, but they were leaning more hawkish. Is that a concern? I mean, the the current forecast is 75 percent chance of a rate hike between now and the end of the year. I think the question kind of becomes, given everything going on, does the Fed view three as the new two or is the mandate get back into the twos? And Warsh has come out and said his primary concern is inflation. He's much less concerned about the other end of the mandate. But if we see inflation pick up because oil in the strait is closed and this whole geopolitical drama in the Middle East is causing inflation because of the price of oil, what's a quarter of a point or half a basis point increase in Fed funds going to do to solve that problem? Probably not a lot. And it goes back to that term we heard post-COVID, transitory inflation. I'm glad you said it, not me. I am not saying it. But I think that is why investors need to have some commodities exposure as a hedge in their portfolio right now. So which commodities? Well, I want to own oil. I want to own gold. I think silver is is making a nice comeback here as well. And ultimately, just a broad basket of commodities futures in general, whether it be soybeans, cattle, et cetera, because if these prices are going up, they're going up because things are not playing out the way the administration wants it. Gold was stuck in a 4,000, 4,200 range for a good seven or eight or nine weeks. It has since busted out. Now it's trading at almost 4,700. It's trading at 4,670, I think. So we're getting close to 4,700. Is that stretch or do you think there's more room in gold? You talk about if there's a sweep, if there's a blue sweep, it becomes more anxious. You think gold goes higher. If the tradeable moves, it doesn't get solved and oil stays up here in the 80s. Gold goes higher, I would imagine. So the function of interest rates there too. It's interesting that gold does not perform well during the whole war that we've had. Why? Because interest rates, particularly real interest rates, went higher. That's when gold doesn't perform. The case of a blue sweep, you get the anxiety. So then you get the safety trade. Exactly. The safety trade comes back. I always call this the gold smile. Gold rallies on uncertainty, but it can also rally on lower interest rates. So it's that kind of thing. Back and forth. Back and forth. I think this blue sweep, by the way, if that actually were to happen, it's likely the treasury yields are going to go lower, so it boosts gold even more. So the gold would be a good hedge against the blue sweep. So tell me, because I'll tell you, I'm leaning that there's going to be a blue sweep. I think we're going to lose both. If you believe, Kelsey, the prediction markets, then there's a... Oh, is that what it says, Kelsey? I didn't even know that. It's been pretty consistent probability there. So it's like, the prediction markets have been better. The prediction markets are better than the pull market. Yeah, exactly. Better than futures markets. So I'd say pay attention to that. What do you think? Do you believe it's on the table? How much more needs to go wrong? We're only eight weeks out from this election. I know. And this war's not over. Oil's not coming back down. Oil's not going back to the 60s by the time election comes. And people are pissed off. A little bit of good news in the last four weeks of the election can easily change the direction of the outcome, though. Okay. The story has not yet been told. It's got to be that good news come October. But to your point about gold, I don't necessarily think it's entirely an inflation story, but it's also just a dollar confidence story that's happening as well. And you have those people who say the dollar is going to get debased, etc. And that's why you're seeing, I think, a little bit of a rally in crypto. You're seeing gold come around. So it's not just an inflation story. It's unfortunately even more complicated than that. Right. But that's why we think we have to have some of those hedges against the equity volatility here within the portfolio. And it may be a good time to have some cash. There's nothing wrong with a little extra dry powder in the portfolio. Actually, cash is a decision, right? If you decide to go to cash, that is an investment decision. That's right. Whether you leave it money market fund or you put it in treasury, that is an investment decision. And you're right. If people get anxious or people are nervous about where we're going, that's not necessarily the worst thing. No, in fact, actually, the cash itself brings the volatility of the portfolio really down. Right. And that is actually a good thing. And for certain periods of time, to have your volatility of your portfolio significantly lower than the VIX, as we go into a certain period, actually set yourself up for an opportunity to re-engage once it's all clear. That tends to be the case. But cash is a good anchor of volatility in the portfolio then. Yeah, sure. Whether it's cash or treasuries, it's still a good anchor, right? Okay. So one last question. And before we go, because we're going to run out of time, Nvidia, do they disappoint or not? Nvidia, I hate to say that they disappoint. They meet and exceed all expectations, but the stock drops. Because that's what it's done every time. I mean, every time the traders hit the sell button because they say it can't get better, it can't get better, but yet it drops and then they take it off again. I think the options market is pricing in a 7% move, up or down, depending on how the market interprets what he says. Which has kind of been the case the last few quarters. Yeah, that's what it's been. And, you know, it's right. Like their blockbuster earnings, they have a good chance to beat, you know, the estimates, but then it's not enough beat for some reason. This news that came out overnight of this price hike, you know, it's a little damper on the stock too. And what comes out of that in the press conference and what are they doing? People are going to be listening to that. And then it's the hyperscaler, like, you know, circular finance thing where Nvidia does have taken equity stakes indirectly. Circular financing, which is always a problem or it's not always a problem, but it it's certainly a concern. Concern, and the stock hasn't performed so well until up until recently, I guess. But yeah, it's interesting because we're right at the highs, you know, by the fact, sell the rumor, rumor, sell the fact. Yeah, yeah, yeah. Yeah. It'll be very interesting in any event. Listen, gentlemen, thank you very much for joining this conversation. I could have kept this. We could have talked for another hour and a half anyway. Until the next time, take good care.