The Compound and Friends - Stock Market Freakout, Claudia Sahm on the Sahm Rule, Buffett Sells Apple

Episode Date: August 6, 2024

On this TCAF Tuesday, Josh Brown is joined by Claudia Sahm, Chief Economist at New Century Advisors and Founder of Sahm Consulting for a deep dive into the Sahm Rule and how it's shaking up the market. Then, at 27:18, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! Thanks to Public and YCharts for sponsoring this episode! Visit https://public.com/ to learn more about how you can earn 5.1% APY with a high-yield cash account. Subscribe to the YCharts Advisor Pulse, and remember, get 20% off your initial YCharts Professional subscription when you start your free trial through The Compound (new customers only). Sign up at: https://go.ycharts.com/compound Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Public Disclosure: Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. See https://public.com/#disclosures-main for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to The Compound and Friends. This show is brought to you by YCharts. At Ritholtz Wealth Management, we are power users of YCharts. We are on their morning, noon, and night, generating data, research, insights that we can share with our clients. Subscribers to the YCharts advisor pulse get direct access to all sorts of market and economic trends and actionable insights you can actually share directly with your clients.

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Michael Batnick and I cover the entirety of this week's sell-off from every conceivable angle. We look at the yen carry trade unwind. We look at some of the disappointing numbers, quote unquote disappointing numbers, from the AI giants. We talked to Claudia Somme, by the way, about the Somme Rule and why some of the hysteria about recent trends in unemployment might be overblown or at least premature. There's just so much here.

I want you to hear it all. I'm going to send you over right now. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Hey guys, it's Josh.

You're probably hearing about the SOM rule everywhere you turn these days and with good reason. We have Claudia SOM today on the show. Stick around, we'll figure out what's going on together. Today's show is brought to you by Public. Make your savings work harder and earn an industry leading 5.1% APY with a high yield cash count on Public.

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check out public.com. This is a paid endorsement for public investing, 5.1% APY as of March 26, 2024 and is subject to change. Full disclosures and terms and conditions can be found in the podcast description. Good afternoon everyone here with Claudia Sam today on a tumultuous day in the market and a fun-filled volatile day overall in the headlines. Claudia thank you so much for doing this. I'm going to read your bio very quickly and then we'll get right the headlines. Claudia, thank you so much for doing this. I'm going to read your bio very quickly and then we'll get right into it.

Claudia is the chief economist at New Century Advisors, the founder of Psalm Consulting and the creator of the Psalm Rule, which is said to be an early recession indicator. Claudia, you are on fire right now. How does it feel to be the biggest celebrity in economics in the summer of 2024? Well, first, thank you for having me. And it would feel better if it were for a good reason. So to have a recession indicator and to have it had triggered, I'm sure we're going to talk about what that means, is not the reason to be in the spotlight, but I'm here to be helpful. That's why I created this indicator. We'll talk about its origins, but yeah, it's kind of a moment.

So I've been around for a long time and I had not heard about the Psalm Roll, but apparently it's something that you created in 2019. The first person to mention it to me was Nick Colas, which he did on the show. And I guess it had a lot of relevance to start talking about now because we're trying to figure out if the Fed is staying too tight and if the economy is going to, the good economy we've had is going to start slipping away before the Fed can start easing. And that's why everyone's talking about the Psalm rule. I want to try to explain it very succinctly and you tell me if I'm missing anything about how the Psalm rule works.

That's important to the discussion. The Psalm rule is a recession indicator. You came up with it about five years ago. And basically what you're doing is calculating the three month moving average of the national unemployment rate. So not just last month's print, but you'll take the last three, you'll average those and you're comparing them to the lowest three month moving average for the unemployment rate that we've had over the last 12 months.

So I have that so far. Okay, you're nodding. That's good. That's the formula. We're there. Okay. If the current three-month average is 0.5 percentage points or more above the lowest three-month average from the last 12 months, that would signal the early stages of a recession. We could talk about how early, but that would be the quote unquote trigger. And I'm so excited to have you on today because as of the last employment report we got, the three month average is now more than just barely 0.5% above the lowest three month average that we've had.

Therefore, the SOM rule is in effect. We all need to put on our helmets. And you tell me what we do next. Now what do we do? Right. So I think, you know, backing up to why does the SOM rule exist. So I started the Federal Reserve in the summer of 2007. So my very first, so my first forecast, whereas the 2008 recession had begun and the

Fed went into, you know, recession forecasting mode, I studied the fiscal response in addition to the monetary policy response through the Great Recession. And honestly, it was lacking, particularly on the fiscal side. And that caused a lot of damage. I'm expert on consumers, households. And that was something that both of my research and policy work, including after I left the fed has been a big focus, the reason the Psalm rule exists, I didn't name it, it was totally a supporting actress in the study where it was shown up was the idea of let's, when we are in a recession, let's get the government to commit to doing

fiscal policy, well designed, effective, figured out ahead of time, and have them commit to hitting go as soon as the macro economic conditions warranted. Right? So the whole idea is- So you went in search for what would be the sign that it's time to go? Yes. And the sign, and I was very specifically looking at fiscal policy that should you, if you are going to give hundreds of billions of dollars to people in the effort to stabilize

the economy, you should do it when the economy needs stabilizing. So like high bar on it's in a recession. And so this was very much looking back over history where all the different episodes of recessions, we've had many different kinds of recessions in the post-World War II period, we have all these dates, and so I was very much looking at the history, what is a formula, knowing that changes in the unemployment rate are a very powerful dynamic, right? Like that shows up in the Psalm rule, it shows up there's other people do forecasting, you know, like

this is, I didn't invent the US S labor market dynamics. I'm just capturing it. But that exact like, what's the formula and like how, what's the threshold came from a, I want to find an indicator that turns on as soon as possible in a recession. Cause that's when you have a chance to do some good, but in a recession. No false positives. But that's not where we are now. So according to your work, the SOM rule, I guess on a back test, would have accurately signaled every actual recession we've had since the 1970s without the false positives

that can occur outside of recessions. This is in some ways similar to my friend, Professor Cam Harvey, who was trying to figure out why the inverted yield curve has been so accurate in predicting recessions, and so far has not had a false positive either. Some would say recent history has been the false positive but he would argue I'm still on the clock. But it's interesting that you created this for fiscal policy while working at the Fed. Right so as the

analyst one of the analysts who covered consumer spending in 2008, understanding what consumers were doing with their, say, rebate checks or later tax credits, the Fed works around the edges. In the staff's forecast, there are estimates of what fiscal policy does the economy, and the Fed can take that into consideration when they do their monetary policy. So yeah, it may seem a little counterintuitive, but that's a very important piece of the health of the economy, understanding consumers. But I will say having watched that episode made me want to help improve the policy for next time. The Sommel was part of a policy volume in early 2019 on how to all kinds of automatic stabilizers

it was just a piece of it and You know it did it comes from the back test, right? I'm looking at history before that it did pass the 2020 calling that recession with flying colors, but anyone could have done that and so and yet there are some very unusual circumstances in this cycle that the SOM rule, in my opinion, I do not think the US economy is in a recession, despite what the SOM rule is stating right now. And yet it is in a long line of indicators and rules of thumb that have fallen victim. The closest comparison to the SOM rule

is not the yield curve, the yield curve is a forecast. Again, the SOM rule, if we're not in a recession, it's off the, it's failed. I mean, I think it still tells us something, but like, you know, but the two consecutive quarterly declines in GDP, real GDP is the most famous and well-known recession indicator, it's even called a technical recession.

Unfortunately, you find out much later that you're in one. We find out much later. That's why I didn't use it for my proposal. That's why I needed something came faster with the SOMRUL. And yet in the first half of 2022, we had two declines in GDP and no recession. You have to go back to 1947 to find that in the US. Let's put this chart up, John.

So this is what the real time someral indicator would look like. We're using Fred data. This is not my chart, but this is a version of the chart that you're seeing pop up everywhere. So you just mentioned the 2020 example. Obviously that's not subtle. That's the greatest spike in unemployment of all time. Let's hope of all time in such a short compressed period. What's happening right now is subtle. We've just inched above this quote unquote trigger. We're at point five three versus point five hundred or fifty

or half a percent. Is there anything wrong with thinking about this chart this way? Would you not put it together this way for some reason, or would you say this is a pretty accurate idea of what the trigger looks like in the data? Yeah, no, I mean, that's the real time. So I do like using the back testing was done with the real time data,

just meaning that I have used the unemployment rate as it was published at the time. The unemployment rate does revise a little bit with the real time data, just meaning that I have used the unemployment rate as it was published at the time. The unemployment rate does revise a little bit with the seasonals. So that's, and the two false positives for the real time Psalm rule come in prior to 1970, and in both cases followed shortly thereafter by a recession.

And there's a real close one in 75. So I don't wanna get into like the false precision of it either, right? And it is dancing right around the 0.5 and it is just a historical pattern. But yes, this shows the, I mean, this is the indicator. Well, but doesn't it look like, I'm sorry, if we put it up one more time, doesn't it look like that 0.5 is a point of no return? It's almost never or never in the period that we're studying here reversed itself without the recession. So, I mean, that's worth noting, right? There's a reason that this indicator has gotten attention, right? I put it, you know, I did not again have my forecaster hat on when I was putting this on.

There are, I mean, on Wall Street, Goldman's had a version of it, Bill Dudley, like people that like, once you get up to a third of a percentage point increase, you know, you define how the increase is exactly, maybe differently, but that has a really high chance of a recession. So this, I've put a very high bar, what I thought would be a very high bar to keep out the false positives. And, and yet I think when to get to this conversation about why it may not be sending

the same signal as it has in the past, you have to go in under the hood. Like this is a very simple rule, simple by construction. Again, it was supposed to be for fiscal policy. This would be some fancy whiz bang model. This was going to go in legislation and it's a victim to its simplicity because there are things going on under the hood in terms of unemployment rate in the United States that are not the recessionary dynamics.

And I think could reverse and that's what has to happen. The unemployment rate comes. The pandemic effectively broke every economic indicator in some way, some worse than others. But some economic indicators or rules of thumb that we used to rely upon for 100 years became completely invalid because of how weird that A, shutdown was and then B, the reopen made things even stranger. And so I think a lot of things like just the reliability of the way that we thought the economy worked absolutely was altered and you've been pointing this out in your public appearances. So what

is it about the current state of unemployment where you say hey guys not so fast things might be a little bit different this time? Right so there there are two kind of basic reasons unemployment rate goes up one there's a weakening demand for workers, unemployment rate goes up, that's very consistent with recessionary dynamics, that's bad, that's the power, and it builds. There's momentum, that's where the SOM role gets its accuracy from historically.

The other reason that you can have the unemployment rate increase is if you have an increase in the supply of workers. And in general, the unemployment rate increase is if you have an increase in the supply of workers. And in general, the unemployment rate can get pushed around. It's even worse right now for the summer because we had early in the pandemic, we had millions of workers drop out of the labor force, like just walk away. Then we ended up, because they didn't all come back as quickly as say customers did. So we had labor shortages, the unemployment rate got pushed down, probably unsustainably because we just didn't have enough

workers. And then in recent years, we've had a surge in immigration, as well as we had a good labor market. So people were coming in from the sidelines. So not only have we had, we've had two rather notable changes in the labor supply. I think as we've learned, and this is like a broad lesson from this, is anytime we have really abrupt dramatic changes, the adjustments can take a long time. So now as we have these immigrants coming in, this is solving the labor shortage. That is a very good thing. Having a larger labor force, particularly as we have many people aging out, that helps keep us growing, that's a good thing.

But in the interim, where they're still searching for jobs, things have slowed down some in terms of adding jobs, that causes the unemployment rate to drift up. Now, if it's just about that supply adjustment, it's temporary. And at the end of it, it's a good thing, because we've got more workers and but that's the the typically and we've had recessions when there were expansions

in the labor force like in the 1970s. I don't want to act like oh just because we have more workers now everything is okay. It's just the the Psalm rule and again as you point out it's just right at the cusp of its trigger, you know, this historical trigger. It is, it's got a lot going on under the hood. They're clearly weakening their supply. Is it denominator that changes? Yes.

Is it denominator? The people that are listed as being available in a labor force does not stay static. And so the numerator moves, of course, the unemployment number itself, but then it's a rate, it's a percentage of, and the thing it's a percentage of is also moving. Right. Now, it can get very complicated, but essentially the big piece that is making the re the current reading of the Psalm roll is too ominous because it is it's folding in that increase in the supply of workers, which is a good thing.

And it's and it's like marking it down as a bad thing. Now the question in this to your thinking about all these indicators that have had a lot of trouble. We've got both things going on here. Right? So I look at this on my I said it broke in the sense of being a recession indicator because we know so much else about the US economy that like right now we are not in a contraction. The Psalm rule typically turns on three months into an MBR data reset. No, like that's not where and and yet those, there is enough weakening,

there's enough of that unemployment rate drift that's coming from less slowing demand for workers, that that raises risks of a recession, three months, six months, like down the road. So I wanna show you a dialogue that took place the other day that I think encapsulates the debate around the Psalm rule itself and how useful it is now versus in past instances. So here's a tweet from David Rosenberg. And David says, the Psalm rule triggered the recession call today.

The chart here shows that the 80 basis point jump in the jobless rate over the past year is a 100% ironclad indicator that the downturn has either arrived or about to. The Fed is as behind the economic curve now as it was behind the inflation curve back in 2021-22. Most of this tightening phase and cyclical bear market and bonds is set to unwind in dramatic fashion." And he posted a chart of the SOM rule triggering, which the response, so this is Barry Redholtz, my partner, full disclosure, and he's friends with Dave. So it was a conversation, but he says, I want you to judge what in here is right,

what in here is wrong. The SOM rule was designed to identify in real time when a recession had begun by measuring an uptick in layoffs, it has never signaled a recession from unemployment levels this low or from an increase in unemployment levels caused by a rise in labor force participation. At Claudia Somme, he gave you a shout out, inventor of the rule, has said she doesn't think

the current measure is indicating a recession yet. For those people who have been incorrectly rooting for recession for two years, they imagine it's mana from heaven. More likely, it's gonna extend their losing forecast record So that's David Rosenberg and Barry Ritholtz and not necessarily one versus the other but like what do you take away from that? Disagreement because that's what's everywhere right now Yeah, no Barry texted me that after he tweeted it. Well, I'm sure he did. So no, I think it's, uh, so I, I am, and I mean, I'm still with, uh, Barry in that we are not in a recession. A recession is not my base case right now. Uh, I, the odds of it are

rising a very key part of it. Not becoming my base case is the fact that not only does the Fed have sufficient room to ease, I expect them to begin easing. Not before September. Oh, so let me add- But I do expect them. But there's all these details. I will say one thing, because there were a lot of little details of of like, Rosie didn't, that's not exactly how the Psalm rules calculated, I do let it, things can drift up over time. So it's only a one year look back. He did say 100% iron clad, I don't know.

Yeah, not the Psalm rule itself, even the real time has false positives. And then just this bigger conversation of history might not repeat. The one thing on Barry's is there are cases, you have to go further back in history. There are times where we go into a recession with a low or lower unemployment rate than now. It is not recent, right? Like so there's all these and and we have a mix. I talked a lot about like the labor supply that's definitely in the mix. We've had, you know, I spent some time looking at,

okay, that's some of that point five, you know, when we get across that threshold, what do the contributions from different types of unemployed, like you can be, because you were laid off, which, you know, Barry mentioned being laid off, you could be because you're a new, an entrant to the workforce, you left a job. We see quite a bit of variation, like the contributions. It is true right now, we're much more, there's more of a, the entrance, the new job seekers, the coming back to the labor force. They're a bigger contributor to getting across

that 0.5 threshold than say in the last, you know, most recessions, but you go back to the 70s, my labor force, it's not that different. So it's hard to pull it out. I do think, like, I'm not in the ironclad. Recession is not a given in, nor, I think, what I read, the history that tightly. And yet I think there are real risks. And as with Barry, I was.

Say in 2022, oh, a recession is coming or we need a recession. I was adamantly, I've never had a recession call in this whole time. It was kind of close to Silicon Valley bank, but I have not had a recession call in. And in part of what I could say in 2022 was look at the labor market, look at consumers, look. And it's not, we are still in a position of strength, but much less. And the momentum is not good. We had 3.6% unemployment and retail sales increasing at an average of two and a half percent a month. You can't say that that's a recession. And it turned out not to have been as much as a lot of people thought, well, we're, and it turned out not to have been as much as

a lot of people thought, well, we're due or it should happen. I want to ask you one more thing. The irony of the way that you've constructed the Psalm rule is if the fiscal authorities, Congress, God forbid, listen to you and you said, hey guys, we have a triggering of my eponymous rule. Therefore you should be doing something for the people most vulnerable on the stimulative side. If they listen to you and do it quickly, your rule will then be proved false because we'll avoid the recession.

You have to be okay with that. It's like, hey, they listened to me and the trigger turned out to be a false trigger because fiscal spending offset the potential recession. Or is that set a little bit to like a superhero saves the day kind of thing? I was going to say, I'm not expecting that. I take it. If it breaks for like did a good thing. I'm more concerned that you know

having a recession indicator than the past has been very accurate but likely is having some trouble right now is fueling or help helping to feed the the fears about the economy like this is exactly the setup that I would not exactly the setup I was trying to avoid by being very like we're well inside the recession, we hit go. But you know, like I said, I and anyone else who does policy advising learn just an immense amount of humility from making an immense amount of mistakes in like, you know, like thinking about how to do this. So no, I wouldn't go back and do it the same. The somersault is the intent of it was to encourage fiscal action. I think maybe an irony of it is it may help encourage monetary policies, the one that

has the lever right now to pull. And frankly, the Fed should be forward looking. If they were going to act to support the labor market, waiting until we are in a recession is actually kind of waiting too long. Well, unfortunately, we had the Dow fall a thousand points at the open in part because that's basically what people believe the Fed is now on track to do. They really, really want to see the whites of the eyes of the recession before firing, I suppose.

Some people are being more hysterical about it than others, but you have been incredibly even-keeled. And anytime I see you on the screen, I turn the volume on, I want to hear what you have to say. And I just want to say thank you so much for coming on The Compound and explaining how this all really works to the audience. I know it's much appreciated out there. And thank you so much for being with us today.

Thank you. All right, Claudia, we'll talk to you again soon. I want to tell people how they can follow you. You are doing the Twitter. You are at Claudia underscore Psalm S-A-H-M And your website Claudiasaam.com pretty easy to find you right? Yep. That's right. All right

All right guys follow Claudia for the real Psalm in the real psalm rule Uh in real time in real time. All right, we're out. We'll talk to you guys soon. Thank you. Ladies and gentlemen, welcome to What Are Your Thoughts? A production of The Compound here on the Compound YouTube channel and podcast platforms everywhere. My name is Downtown Josh Brown. In case this is your first time watching and or listening. And I'm here with my cohost as always, Mr.

Michael Batnick. Michael, say hello. Hello, ladies and gentlemen. All right. Tonight's sponsor, Y charts, Y charts. If you're already taking advantage of all the free content, Y charts puts out. You're definitely going to want to check out their LinkedIn newsletter. What else should we say about this?

Michael. You're definitely going to want to check out their LinkedIn newsletter. What else should we say about this, Michael? I use YCharts all day, every day, including Sunday. Sunday night. Oh, what's going on with this carry trade blow up that we're going to talk about? Let me check the yen strengthening. Boom. Punch it up on YCharts. It's there. Everything's there.

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Okay, the big question this week in the markets, Michael, is it too late? Did the Fed already way too long? Is the error, uh, on, on, uh, unfixable? Like what, what are we, what are we doing now? Dude, you're being very undue. No, it's not too late. I don't think it's too late. Are you sure? No, are you sure? No, I'm not. Okay. I'm not sure. But if, if you had to say a percentage of confidence that it's not too late, these are the odds, my friend, they're odds. So we could say two things. Number one, you and I both agree

that they should have won in July, but by the time of the next meeting and assume they had to come in September, will everything have come unraveled? No, I don't think so. So is it too late? Like I would say no, minus 115, minus 120. So not a table pounding, not an emphatic no,

it's not too late, but nevertheless, no, it's not too late. Because, because. Things have been set in motion that cannot be stopped. Go on. The someral has been triggered. Just saying it has. In my experience, just, I don't have much more experience than you do, but once the unemployment rate

starts to get going, it's really tough to reverse it without it going too far. So far, by the way, this is like a little bit early on this because we're still adding jobs each month. It's just that the data is now disappointing, the downside. So, I've never seen them come to the rescue in time. So, there's so much weird shit going on in the economy as we unwind from the effects of COVID. Kevin Gordon from Schwab tweeted a chart that shows there have never been four months where the unemployment rate rose for four four months where the unemployment rate rose for four consecutive months without it triggering a recession.

That's never happened before. Could happen this time. But the reason why I say it's not too late is because, yeah, usually when unemployment starts going up, it doesn't stop or slow down. But things are still very, very unusual in this economy. And I think that a lot of things that are like set in stone type economic laws, throw them out the window. It's not a reliable playbook.

That's the good news. And this is the point that, so we had Claudia Somm on the YouTube channel last night, and she basically said one of the problems with using this trigger for the SOM rule, meaning we're half a percentage point above the lowest three-month average of the last 12 months for unemployment, is that the labor force is growing. So more workers, because we've had a resumption in immigration, which immigration was effectively shut off for the two years during COVID. Now that there's immigration again and other things, the labor force is growing again,

which means the denominator that we get the unemployment rate from is changing. So it's not like a hard and fast, oh, that's it. We're at 4.53%. That means it triggers a recession. So she's not so sure that her rule will work as it's worked since she started to document it using the 1970s and forward. This time could actually be different and that's coming from the horse's mouth.

Here's what we know, right? Cam Harvey was saying something similar, like people invent the rule. No, no, no. Cam Harvey said it's a done deal. No, no, no. My point is when the yield curve inverted, similarly, he said, listen, this worked in the past, but things are very odd right now. So rules that have worked that you could like take to the bank might not be so today. Here's what we know. We know that the Fed will cut rates, right? Right? Yeah. Yeah, we do know that. So it's coming in a month. We don't know how many cuts. We don't know how big the cuts will be, but we know we can prepare for cuts. We also know what we're hearing from

corporate America. And it's mixed. It's not amazing. Things are slowing down a little bit, moderating, normalized, whatever you want to say. It's not gangbusters, but is anybody saying like, this is an emergency, we are completely screwed? If you look at the real time data, it's fine. It really is fine. So no, I don't think it's too late. I listened to Dara on the Uber call this morning

and his comment was, look, we obviously service the high end. Like his consumer is not the consumer that's shopping at Five Below. His comment was, look, we obviously service the high end. His consumer is not the consumer that's shopping at Five Below. If you're buying food on Uber Eats, it's $30. If you're taking an Uber instead of a bus to get somewhere, you're the high end consumer. He said there's absolutely no sign of a slowdown anywhere.

Beat on earnings, beat on revenue, gave great guidance, and they're just not seeing it in the data. They're not even really talking about trade downs or anything like that. So it doesn't mean it'll stay that way. Do you think it's too late? I want to read. Well, I'm not sure how I feel. I want to read you something that Cam Harvey wrote.

This seems... So Cam Harvey is the father of the yield curve indicator, friend of the show, he's been on, he's in the too late camp and the yield curve has now been inverted for 20 months and I want to read to you what he said. Quote, it has begun. Over the last year, I have made the strongest possible case for the Fed to be proactive. Rates should have been cut this week. Indeed, the rates should have been cut in January.

We have seen this movie before. The Fed was late to take inflation seriously in 21. They brushed it off as transitory. However, it seemed obvious that inflation was surging. Real-time shelter inflation was increasing at a double-digit rate. Shelter has the highest weight in the CPI. Shelter operates with a lag. Hence, it was easy to forecast the surge.

The Fed was forced to react after the damage was done. So Michael, what he's saying is that we're doing the same thing all over again. The same mistake has been repeated despite many warnings. The CPI print was 3% year over year, but two thirds of it was driven by one component, shelter. And we know the shelter data the Fed is using is like a year out of date. If you were to have been using real time shelter data, you already would have been cutting earlier this year.

And please let's put this chart up, John. COVID error savings have been depleted as credit card delinquencies reach new highs. Here it is. So this is the thing that we said, let's keep an eye on it. Let's keep an eye on it. And here it is. So you've got a consumer that's basically done with the post-pandemic spending splurge. They have run through those savings.

And now we just heard from the financials, they're not panicking, but they're reserving more money and they see delinquent bills beginning to pile up. So these two things are happening in confirmation of a softening labor market. And so Cam's in the too late camp. So they were too late to hike and they are too late to cut, but those two things are not the same.

It's not symmetrical because they were too late to respond to inflation, which was surging. And on the other side of it, things are cooling normalizing. It's not like the wheels are falling off. So it's not exactly the same thing. I think the danger of being a little bit late is not the same thing. Respectfully, it's not the same thing. I think the danger of being a little bit late is not the same thing. Respectfully, it's not the same thing if you're talking about corporate borrowing and balance

sheets, but we're not. If you're talking about consumers and small business owners and the people that corporations need to keep spending, it is the same thing. And the Fed made this mistake in 2007. I don't think they cut until October when it was clear all year that they were too tight. And guess where they were? Five and a quarter on Fed funds rate. And they stayed there and they stayed there and they stayed there and they wanted to wait

and they wanted to wait. And then when the hedge funds and the banks started to blow up, then they started to cut. But it was too late. It was too, things had been sent into motion. We know how fast narratives change. And if come September, the S&P is near all time highs and the Fed cuts then, all this will be forgotten. I'm not, again, you're having an S&P conversation and I'm having an economy conversation and

the two things are related related but not the same. And they certainly don't move on the same timeline. Fine, fair. But even looking at the economy, yeah, things are not as strong as they were a couple months ago. There's no doubt about that. I just don't know that this needs to, I just don't think that the wheels need to come off. I don't think it needs to get that bad.

No, nothing needs to happen. I wouldn't, I wouldn't, look, Cam is like, this is done, this is guaranteed. I'm not saying that. I'm repeating what he's saying. I'm just saying it's unfortunate that we had to go this far and we had to blow through so many obvious opportunities to change the situation. For the real economy, forget about the stock market, does it matter if they cut in August or July or September? No, they probably should have already started cutting. July is probably, in other words, we know that these things are operating on a lag.

So July might have also been too late. So if you listen to people like Cam, you listen to Neil Dada, people that we read and we respect and who are not just noisemakers for the sake of getting attention but really believe the words that they're saying. If the Fed needs to be more proactive, it needs to stop with the data dependent. If the data it's looking at is operating on such a lag that renders monetary policy less effective. So I think we agree. We both think that the Fed should have cut in July, or maybe we don't agree. I don't necessarily think that it means that the economy is going to materially soften.

It might or might not. I don't know. We'll find out. Well, if you have 2% and change percent GDP growth, if you're lucky, and inflation is like 2.5 percent on PCE. Why are you at five and a quarter? And a better question, and Neil Dutta has asked this question, okay, let's assume that the Fed wants to be data dependent.

Can you even come up with a mechanism whereby inflation accelerates from here? How would that happen? What would make that happen? Why would that happen? What would make that happen? Why would it happen? We're saying the labor force is growing and the pace of hiring is slowing. And shelter prices broke two months ago. Everything's cooling. But so by what metric is it too early to cut rates? How do you envision inflation reaccelerating to the upside? What would be the thing that causes it? Nobody should come up with that answer. What do you think about the calls yesterday for

an emergency rate cut? I was sad to see, I saw the clip of Professor Siegel screaming for a 75 basis point cut. Again, we know that these things operate on a lag, so I don't even know what that would do. I actually think that might have caused panic had they come out and done that. I was sad to see that. I wish he had... Look, he's another person who's been saying the Fed is too tight if you look at shelter data that's not from the Stone Age.

So I think he's been right. I don't think it helps to go on TV and scream like that, at least at this point. We have traders now betting on a high probability of an intra meeting cut. I would take the other side of that. What are the odds? Where are you seeing this? 60%? Where does that even show up?

This is a Bloomberg article yesterday. Bond traders are piling into bets that the US economy is on the verge of deteriorating so quickly that the Federal Reserve will need to start easing monetary policy aggressively, potentially before the next scheduled meeting. No way. Traders now see a roughly 60% chance of an emergency quarter point cut within one week. Well, 60% of the time, it works every time. I don't know about that.

That's a lot. Here's Yardeni. He said, we don't think the Fed will be that responsive to this pullback unless a global credit crunch results from the yen carry trade. Unwind, we are sticking with just one cut in September for the rest of the year. No recession, no bear market. This too shall pass. Peter Bookvar said, the only reason I keep hearing people cry for an

intermeeting Fed rate cut is because the Fed over the past few decades has bailed out markets so many times. People have been trained all too well to expect it. Dallas Fed President Richard Fisher yesterday, quote, the Fed will always act as if something occurs that threatens the credit system or the economy and it is not yet clear what has happened in the last few days, including with the Dow off over a thousand is going to threaten the economy or the credit system. I think that's right.

I don't see, I mean, I don't know. Maybe somebody else sees something that I don't see. So the economy is softening and the Y carry trade unwidened are different things. They're different things. They happen simultaneously. They're happening at the same time. Which is not great. But the yen carry trade, which we're going to talk about later, seemed like more than

I was a market event. What does that do with the real economy? Well, they're not unrelated. Part of the reason why the carry trade blows up is the Fed cuts while Japan is raising. No, I understand. I understand. But for hiring and things like that. Look, I think you had four things happen all

at the same time that are somewhat related, but not definitely related. And they all contributed to the Sunday scaries. So Yen? AI earnings disappointing, which you had Microsoft and Amazon to the Sunday Scaries. AI earnings disappointing, which Microsoft and Amazon both disappoint on cloud. Nvidia came out and said the Blackwell chip is going to be delayed. That's an AI related disappointment and those stocks are really important to the market.

The Yen carry trade unraveling and the Nikkei having its biggest one day drop since 1987. Three, Warren Buffett cut his Apple position in half very unexpectedly. And then four, an unemployment report that is now bad news is bad news. Those four things were an insurmountable challenge to the sentiment and everything just broke at the same time. That's it. Guess what? I mean, it's not that complex. If this is how the fever breaks, I'd rather this than something else happening, like Apple like bombing their earnings, which is not what happened.

So this is an okay sell off. So now you have, it's August 6th today. It's actually my mom's birthday. I got to send a text. Happy birthday. It's August 6 today. Now you're in a situation where you have basically six weeks until the September Fed meeting. They can do a lot of signaling at Jackson Hole, which I'm sure they will, to maybe try to calm people down.

But it's a lot of time. And Bank of America took a look at the probability of there being an intermeeting cut and Michael Gape in the US economist at B of A basically says no way. We count nine emergency rate cuts if we include the response to the black Monday stock market crash in 1987 when the funds rate was not the principal tool of policy. Intermeeting cuts are truly emergency-based actions. The evidence in each of these, they reviewed each of the nine cases, Michael, in which the Fed did something intermeeting.

Each of these cases comes amidst truly emergency conditions in the economy or financial markets, global pandemics, the bursting of asset price bubbles, systemic events with sizable spillovers like the GFC, LTCM, Russian financial crisis, acts of war like 9-11. There's just none of that going on right now. Yeah, hedge funds blowing up is not recent to emergency. Unless they're going to take the whole market down with them repeatedly. That's exactly right. Which thank God it's early, but it doesn't appear that to be like that's the case.

Even a stock market fall, Gaepen points out, the S&P 500 fell by only 15% after the 9-11 attacks, but the economy had already lost jobs for eight consecutive months. Only two weeks before the 9-11 attacks, non-farm payrolls fell by 259,000, which we're obviously not seeing. So you had an intra, you had an intermeeting cut after 9-11, and the stock market was down by 15%. But the context was we were already deep in a recession with huge job losses.

So like that- Did you hear anybody say that we're in a recession now? No, right? No, what people are saying is it's too late. The trigger has gone off and it's not gonna turn back the other way. And to their point, these things do have a momentum to them. They, economic data in the short term oscillates,

but in the long term it does trend. Especially things like employment, because it's a psychology thing. So can you think of a lot of CFOs right now, who are like, you know what, let's do a whole bunch of hiring. Like everyone is in this mode of how can we get by with less, with less, with less, and eventually it spills over. let's do a whole bunch of hiring. Everyone is in this mode of how can we get by with less, with less, with less, and eventually it spills over.

I feel like I don't think it's too late, but it didn't need to get to this point where we even think it might be. We had the soft landing. We threaded the needle, why are we first doing the first rate hike with economic data repeatedly surprising the downside? It just doesn't make sense to me that the Fed needs to be that reactive. But anyway, I think we beat this to death. Okay. So I was going to talk before we had the yen plosion, it's so interesting how quickly the narrative changes from mag

seven, the only growth in town, and then for reasons that are, you can come up with reasons, but we saw the stocks that had been left for dead start to outperform. The Equal Way we were talking a lot about just wasn't really outperforming. And so looking at the highest alpha for beats, this is from Bank of America, since Q4 2018, we're looking at the relative one-day performance for companies that beat expectations and for companies that missed. And what's in here, so the companies that beat expectations had a hell of a day. But what's interesting is a lot of these companies were the companies that had gotten the crap kicked out of them. McDonald's is a great example of this.

Yeah. So you have a lot of stocks that just like nobody was very excited about their numbers. Yes. And then they came out, they beat on earnings, they beat on sales, and the stocks were rewarded that day at a rate that we haven't seen in years. So companies that had depressed expectations that had been left for dead that nobody cared about versus the Microsofts of the world that, oh no, Azure only grew at 29% versus 30, and the stock gapped out immediately 7% over whatever it was. So that trigger, it happened because it happened. You could come up with reasons that are reasonable,

but it happened. Okay. I want to look at some of the MaxEvon earnings stuff just to remind you, not you, Josh, but you, the viewer, where things stand and how these giant companies are performing. So Alex Morris tweeted, Meta's trailing 12-month revenues per average employee skyrocketing. Their earnings were up 20-something percent. I'm sorry, their revenue was up 20-something percent. Their expenses were only up 7%.

Not quite an all-time high for the advertising revenue, but right about there. Try it out for a second, John, please. And the point that I wanted to make earlier that I forgot to is that a lot of these companies already right-sized the ship. There was a lot of, and I know we're talking about corporate America, so it's not exactly the same thing, but 2022, 2023 was the year to shed expenses. So I don't know how quick companies are going to be to then do like another round of layoffs. I think we did that already. was the year to shed expenses. So I don't know how quick companies are gonna be to then do like another round of layoffs. I think we did that already.

Well, if revenue falls, they will do another round, but that's not the case right now. They're still growing and business is great. And that's why you're getting these outsized earnings, year over year earnings gains, because to your point, they acted as though there was a recession in 2022. There was for them.

And 2023, and I guess for them there was. Wasn't truly an economic recession, but there was definitely a growth scare, and everyone in Silicon Valley all at once said, okay, the rate at which we hired during the pandemic was absurd. We have a lot of employees who are here to have brunch and film TikToks and take meaningless meetings about nothing. And we're going to get rid of that layer of employees and we might even cut a little bit deeper in some areas. And the end result is so long as business

didn't fall off a cliff, all of these companies became way more profitable than we thought that they would be. And so that surprise is reflected in huge rallies for their share prices in 2023 and the first half of 2024. If we don't have the economy fall off a cliff, Meta doesn't need to have another round of layoffs, because to your point, they've already done it. But in an economic downturn, I would say they're probably not done. And that's probably a story that extends across all these companies. So two things are true.

Just because of the Mag-7 stocks were working doesn't mean that everything is amazing in the economy. Just because the Dow dropped 1,000 points yesterday or two days ago, that also doesn't mean that we're going to a recession. Like the stock market doesn't tell the truth all the time. Sticking with some of these giant tech companies, Azure revenue run rate, I mean, you know, up until the right, just incredible growth. Apple services revenue, new all time record. Apple gross margin, new all time record.

I don't know what else could you possibly want? All of these fundamental, forget about the stock price, all the fundamentals of these companies look incredible. Last one, AWS at Amazon, free cash flow trail in 12 months going up and to the right. AWS, all-time high, not quite as fast a growth as it used to be, but still up 19% year-over-year for AWS. Josh, here's an amazing chart that I've never seen from Daily Chartbook. Compared to the early 2000s, there's no bubble in tech employment.

Look at this. So we're looking at tech share of US employment. And for those who are listening, this got over 5% in the peak in 2000. And today, by the way, you see that right sizing, Josh. Um, you see the layoffs in 2022 today. It's, uh, 4%. Yeah. One of the things that happened during that, that tech, that tech bubble in

the nineties was anyone who wanted to go public could go public. We just had like thousands of companies that had a lot of money and they needed to hire people. If you raised equity via IPO in 1998, 1999, you needed to go out and hire people. And a lot of people just got these fake jobs at fake companies. They didn't know it at the time. They were being compensated with stock. these fake jobs at fake companies. higher quality tech sector. in 2000, but they wrote it in 1999. And he goes into the men's room and pulls the toilet paper dispenser.

And it's a roll of stock certificates. Like that, like that's how they're, that's how they're compensating employees. Um, so that, that was a sign of the times we, we did not have that. So I just, were these advertising charts? Just, we already did that, but just to put it above this, I say all this to say that I love a re-rating of the best companies in the world because of an unwind of excessive leverage and margin and things that have nothing to do with the fundamentals of these companies. Now, if you tell me that that's going to lead to a permanent re-rating of the AI bubble burst, sorry, I don't think that's the case.

I just don't. Maybe this looks very foolish in a couple of months, but I don't believe that to be the case. If organic cloud computing growth at Microsoft, Amazon, and Alphabet is now going to be closer to 15% than 20%- That's different. Then the re-rating is justified. Yeah. That's different. Then the rerating is justified. And it honestly doesn't make sense that you can have those three players plus I'll throw an Oracle all growing at 25% a year or even 20% a year.

It seems impossible. Counterpoint. Go ahead. Jassy said on the Amazon call, I hope I'm getting this right, that only 9% of companies have migrated to the cloud. They're still a long one way ahead. That could be. That could be.

It still, it seems like there's still a lot of capacity being built to chase that demand by a lot of players. We're not in the situation where it's AT&T versus Verizon. to chase that demand by a lot of players. We're not in the situation where it's AT&T versus Verizon. So it's not matured, I agree with that, but I don't know if 20% is possible anymore. If AWS can't do it and Azure can't do it, that's going to reaccelerate in a year. AOI. So, well, maybe. All right. We have to cover this yen carry trade thing.

This is one of the dumbest reasons for people to be nervous about the market that I can come up with. I know you added it to your reasons to sell chart and I was glad to see you do that. Are there things that haven't been said in the media or that are worth us delving into here do you think? Well, I guess what I would say though is nobody gives a shit about the reason. Like that's a thing. Well, I certainly don't.

Like nobody that texted me yesterday asked me about the yen. They asked me about the stock market. Can I ask you a question? If I landed from another planet today and I looked at the stock market and I said, explain to me what the yen carry trade is and why it affected the stock market. How would you explain it? Let's say I'm an alien. I understand English, but I don't know anything.

What would you say? I would say that there are different borrowing costs for different currencies and you could borrow in this currency and then buy in that currency or borrow here and invest here. And one of the currencies was really cheap to borrow from and people were doing that for years and years and years and it worked for a long time. And then one night that thing unwound. Okay. So retail investors in Japan are probably not the cause of this.

No, it's hedge funds. This is hedge funds who are, this is a carry trade. It's a very well-established thing that banks are facilitating. Dude, Buffett did this. Buffett did this. When he bought his Japanese stocks, he borrowed in yen. He sold bonds denominated in yen, correct. Okay. So you can borrow cheaply in yen and you could use that money to buy assets in the United States. It's a free piggy bank. Right. So it's great until it gets thrown in reverse all at once. So the Bank of Japan did a quarter point basis point hike, a quarter point hike in interest rates at the same time that here in the US we know the next move is lower and as a result that differential is what caused some leverage

on wines. Hey, you got to put up more money. It's a margin call. So do you think the bank of Japan knew this was going to happen? They must have, right? I'm sure it was on their list of potential things that could happen. No, no. And one of the things that I did like a one minute hit on CNBC just to talk about the

Berkshire Apple thing. But Scott asked me about this. I just said, if you're not, if you're not leveraged, why would you act like you're leveraged? Great point. So like the people who were selling yesterday for the most part had to and that's fine. Those are professionals. This is what they do for a living. They buy and sell their hedge funds.

If you're not one of them, what the f**k are you doing? Like why are you freaking out? Why are you going to start selling? So I never understood this idea. The only thing I could come up with is people are getting like macro commentary from people that are treating regular investors as though they're institutions in the way they speak to them. Like, oh, this is blowing up. You better do something. Who, me? I need to do something something I'm not doing any yen carry trade shit I'm just

a I'm just a humble shoemaker. Now I think I think the the thing is that when people see this they think uh-oh is the I'm using air quotes bubble about to pop do I need to get out it has nothing to do with the macro it's just they scared. They get scared like. You know what I saw that disappointed me yesterday? James McIntosh did a piece comparing yesterday to 1987, 1998 and 2008. Why? I think the 87 and 98 comparisons are fair. You do?

Yeah. Yeah. I mean, he may, he concludes with this. Isn't that, okay, great. So he cleared his throat for, uh, 3000 words and then he's like, yeah, but don't worry about it. I honestly don't understand why you think this is an apt comparison to 1998. In what way? Cause that was a currency.

That was a currency blob. That's not like two to seven. Crisis. There's no crisis in the end. That's not like Tudor's template. Crisis. There's no crisis in the end. It's just, it isn't that. It's literally not that. In 1998, the Russian ruble went to zero.

There were people that were stuck going the outside of their homes with worthless rubles. Listen, I'm just saying we don't have a million comparisons. It's not totally ridiculous. The 87 one, we know what happened. There was leverage unwind and markets crash again. Can I give you a better comparison? Sure. OK.

September 2014, the Yuan refix in China, the S&P 500 fell, believe it or not, 20%. And I think 16% of that 20 or maybe it was 16%. I forget the exact number, but it was as close to a bear market as a currency has caused. So that morning or that afternoon I had lunch, I think it was August 24th.

I think that was the date. I had lunch with Barry and Jason Zweig and I was like scratching myself. So I was like on my phone the whole time. I was like, guys, I gotta to go. I got to go. What are we doing here? Yeah, yeah. Right.

So because they're kibbutzing and the world's falling apart. Okay. But that was over a very minor, mild adjustment to the yuan. But it threw a lot of things into like it threw a monkey wrench into a lot of things that were related to currencies and borrowing and leverage and whatever. That's what this is. Why are we having 1987 comparisons? Well, the Nikkei, it was the biggest drop of the Nikkei since 1987, literally. So it's not, it's not ridiculous. I understand. No, I understand. I understand. The Nikkei has now recovered what percentage of that drop as of right now.

Had a huge comeback overnight. It fell 12 and we gained 10. It's still down. It left a mark. It left a mark. You could see for, you know. For sure. But best day since October 2008.

Now, it's not, I'm not ready to say best day since October 2008. Now, I'm not ready to say it's over. Like, we'll see. I hope that was it. But we'll see. I don't know. Oh, no. I wouldn't.

I wouldn't say it's over. But I would also say, imagine the ridiculousness of thinking that you need to do something because a carry trade blew up that affects mostly global macro hedge funds. The only thing you needed to do yesterday, the only thing you needed yesterday, if you did anything at all was panic buy. And with that, let's look at some context here. So ChartKid made this for Ben.

94%, every year basically has a drawdown of 5% or more. Two thirds of all years has a drawdown of 5% or more. 2 thirds of all years has a drawdown of 10% or more. We didn't, I don't even think we got there. Did we get to 10%? I don't even think so. No, the S&P was in an 8% drawdown or something. OK, so the reason doesn't matter. I mean, I know it always matters, but it doesn't matter.

It matters at the time, but not in hindsight. It matters at the time. This next in hindsight. It matters at the time. This next chart from Charter is really eye candy. It shows the days when the knee can move less than 1%, rows are fell more than 1%, and then there's a few months to outliers. So for those who are listening, they've got dots for every day, going back to 1985.

And the dot yesterday on August 5th was, as we just mentioned, the second, the second worst day of the last almost 40 years. So listen, it did the thing. What was so interesting about the open in the United States stock market yesterday was we had this massive, massive VIX spike over 60, which doesn't happen very often. You had that in the GFC, you had that in COVID. But what's different now versus then is those VIX spikes happened within the context of

a broader deterioration in stock prices. We were already in a massive drawdown. And here, you had a VIX spike over 60, we were down 9%. Very, very unusual. I had a lot of green stocks yesterday like on my screen. Yeah Like we talked about Kerrig dr. Pepper the other day here. We did make the case I'm not long the stock at the moment, but like that was green. I had utilities green. There were 26 names on The on the best list the best stocks in the market list that Sean and I keep. There are 26 names on there, Coca Cola's on there,

Duke, Consolidated Edison. Consolidated Edison, I've never heard of Consolidated Edison. 26 stocks out of the S&P 500, that's 5% of the index. Is that 52 week high? Yeah. So you had a VIX at 60. It was weird, it was very weird. And you have all these green stocks

So anyway when people panic sell, I'm sorry You have to panic buy if the VIX is over 60 you have to buy something. I don't care what you have to buy I didn't buy anything else that I had to do Oh, I did I did the one thing I bought the I bought the inverse VIX ETF right at the open As soon as I saw VIX 55, I said, okay, this is the dumbest thing I've ever seen in my life. You're going to be mad at me. Sunday night, I bought Bitcoin and ETH during the puke. It's the only thing I could buy. Although I did think about buying- Did they recover? I won't be mad at you. Did they recover?

Yeah, a little bit. But I thought about buying NVIDIA on Robinhood, but it was just so early. And the other thing is I need access to margin. I didn't have money in my account, so I had nothing to buy, I was fully invested. Dude, respectfully, Bitcoin and ETH acted like garbage. What do you mean respectfully? I don't care. Yeah, no, I know.

No, respectfully to the people watching the show, I don't really understand what the, it's just, it's like 2X NASDAQ. They don't really understand what the it's just it's like 2x Nasdaq like it in it It this they don't hedge shit there. I don't think anybody actually says they're a hedge like nobody actually seriously says they're a hedge They're not a nice when they're when they're green people say look. It's hedging. Well, you could ignore those people I was this I was disappointed that Bitcoin didn't act more gold like Because this is not an economic meltdown. It's a carry trade blowing up.

Why wouldn't Bitcoin work? Well, with Bitcoin specifically, there was allegations that one of the largest crypto players was dumping and people really don't know why. So that was sort of a separate but related event. Anyway, so I did the inverse VIX trade. I didn't make that much money on it. I closed it out at the wrong time. But I should have bought, uh,

Uber was in the fifties. I should have bought some Starbucks. Um, I should have been more active personally than I was. I was just busy doing other shit. And it was over very fast. It was over very fast. Um, and maybe it's not over. We'll see it.

There's a strong balance. But my point is when the fix is spiking like that, you gotta put some money to work. So we got a few charts from Todd Sohn. Check this out. We're looking at the S&P 500 forward six-month return versus various VIX levels. And it's not always up and to the right, but for the most part it is. So he then breaks it down into deciles readings for the VIX and forward six-month returns. And the 10th decile, which is a VIX over 30, six months out, returns

are incredibly strong for stocks. And listen, this is it. You buy panic. Now, it's a little bit weird again, because, man, buy panic. We're only down 9%. Okay. I was going to say, this is not going to work the way that historically it's worked because the market didn't come down that much. It's weird. So I would take that chart with the greatest. So I like the visualization that you want to buy Vic. First of all, Todd's point, my point, your point, or the right point by panic, Vick 60, shut the up and buy something. Yeah. Like the most obvious thing to do that neither of us did. Well, I bought, I bought the car that I didn't have time to

do. Okay. Also, inverse ETF volume was the highest since the SVB failure. So there was legitimate fear yesterday. Now, no offense, what sort of donkey was buying inverse ETFs at the open yesterday? Inverse VIX ETF, me. Inverse VIX ETF, not inverse stock ETF. Oh, were there people selling on the open?

Yes, that's how it opens down 900 points. No, but buying, take the fix out of it, buying like inverse, Nvidia, or whatever you're, whatever you like. I don't know. Yeah, well, there are people that do that because they want to stay long Position but they want to hedge against the market getting much worse. I don't that's not I don't do that gap down 4% That's a tough listen. I don't do I don't hedge positions if I am trying to manage my risk

I limit the size of my positions or I use cash. I'm not out there being like, well, I don't want to sell this. So let me trade this other instrument that should offset the, I just not, there's nothing wrong with that. I don't do that. Meanwhile, meanwhile, meanwhile, you couldn't even get it to shrub anyway. Yeah. So good. Right.

So maybe that, maybe, maybe that's why it was, it was, uh, it was so weird. Uh, put this back up though. Inverse ETF volume. So the point that Todd is making is it's shy of prior bearish extremes, but it is a notable spike for inverse ETF. Yeah, it's usually things that you see around bottoms. But again, the difference is that this time,

it's hard to say we're at a bottom when you're down eight, 9%. Yeah, I don't envision this one resolving with a V-shaped recovery in the month of August. I think what we're going through right now is fundamental and it's not just the yen carry trade blowing up. There were some real concerns about growth and there were some real concerns about the Fed maybe being a little bit too late. And I just, I could be wrong.

Let me ask you this. We know, we know how the stock market will react if we get more weak data. It'll puke. How would the stock market react if we get a really nice rebound in data? And we say, oh, those July numbers were due to weather or whatever the case may be. Yeah, it's possible. I mean, it's happened before. They've been a million headfakes.

So I would never say, nope, this is it. This is my opinion and it can't change. My opinion right now is that we really are seeing, I hate when people say the consumer, we are seeing the bottom half of consumers make material changes in their ongoing spending. We are seeing corporations that cater to that consumer desperately trying new things to bring them back to spending. And now we're seeing the unemployment data surprise repeatedly to the downside. And just hard for me to get to a V-shaped recovery in my head for stocks. I mean, we'll see. That's what happens. Buffett sold half a stake in Apple. I think my personal

opinion is when that news hit over the weekend, that was the straw that broke the Nasdaq's back coming into Monday morning. It made everything worse. Absolutely. Apple still would have had a monster gap down. Yeah, I think so. Berkshire sold $75.5 billion worth of stocks, which boosted their cash and equivalents to a record $276.9 billion. Now, it's important for me to say it's a record cash pile, but as a percentage of Berkshire's market cap, it's about 34%. The average that Berkshire holds in cash is like 25%. Try not to jump. Okay, thank you.

Thank you. Oh, it's 31%. Okay. So it's elevated relative to history in terms of like how much cash they have, but relative to market cap, and this is quarterly, shout to Chart Kid, it's not some insane number. It's just at the higher end of what's been typical. And people, look, I get it. It's juicy.

Journalists want to write about it. People want to talk about it. And maybe their cash balance goes even higher. But the market cap of Berkshire is near an all-time high. The stock has gone from $300 to $430 in the last six months. Dude, you know what's also at an all-time high? Berkshire's liabilities. Yeah.

Which is what they're funding with all this cash. So I think people need to relax. Now, that being said, this is their biggest stock position. They've been in it for over 10 years and they just whacked out half of it. And Apple is trading 30 times forward earnings. So there's no way Berkshire sees as much potential upside as they did when they started buying it. There's not. There's not. So I have two things to say on that. Number one, we spoke, I can't remember what about Apple's price to sales ratio was trading between three and four times forever. And then it just went vertical into a different regime. And guess what? Buffett,

whatever, his lieutenants, they nailed it. They absolutely nailed it. One of the best investments of all time. And it's still, throw this Axe Morris chart on, it's still 30% of their portfolio. So to say anything that Buffett is even remotely bearish on Apple, fine, he doesn't see the same upside, is a joke. It's a third of their portfolio, one third. That's assuming they're not spending this quarter selling the way that they were last quarter.

Fair. Okay, fine. But I'll give you one more thing. John Huber had a great tweet about what Buffett can do with his cash. He said, there are probably only 50 stocks in the US that Berkshire can buy that will make a difference. So think about a $600 billion portfolio. So a 5% position is $30 billion. This limits

its universe to $300 billion market caps at a 10% ownership. Guess what? There are only 27 stocks in the US this size. So if you go to a 20% ownership, and that opens it up to an additional 50 or so, but it's difficult to buy that much. And this is only for 5% portfolio position. All right. You got the point. Chertoff, there's only 27 stocks that he could buy legitimately that would move the needle. So, okay, maybe he is doing some buying right now. We don't know. We'll find out next quarter. Yeah. One of the more likely things in recent years, what we've seen is he picks an industry and he buys a whole bunch of the best players. So we have seen them operate that way.

I don't know if that's out of necessity or not, but when they wanted to put on that Japanese trading house bet, they didn't pick one Japanese trading house. They bought five of them. They took really big stakes. We've seen him do that with the airlines. So he doesn't necessarily have to find the one company that's big enough for him to invest in per se. If there's a view that he wants to express, he absolutely could express that over multiple

companies. My best guess, if you ask me what he's about to do, my best guess is it'll have something to do with home remodeling and home renovation. Because if rates are coming down and mortgage rates are falling, and we're going to get this restart to existing home sales, and people are going to refi, and we're just going to see more activity in real estate, combine that with the demographic tailwind that is the millennials in their peak home buying and family formation years and just the overall shortage in housing that we have. I think Buffett's going to want to take advantage of that situation and I would not fall out

of my chair if we woke up one day and saw him with a giant position at Home Depot or Lowe's or Sherwin Williams. Okay. So I'm so glad you mentioned that. So I'm looking at the market caps at the some of these companies. Like what would be a buff name? Like, Oh, maybe dollar general. That company's been around. There's a long legacy and it's in trouble. Maybe you buy dollar general. Guess what?

Dollar general is $27 billion. It wouldn't even move the needle from the entire, if you bought the entire company. So you mentioned Sherwin Williams, $86 billion. He can't buy it unless he wants to buy the whole thing. He can't buy it. Like, Oh, what about a company? My point is he can buy seven billion. He can buy seven billion. He can buy seven billion. He can't buy it unless he wants to buy the whole thing. He can't buy it.

Uh, like, Oh, what about a company? My point is he can buy seven of them. He could buy three of them. We've seen this. Warren, but that's not, but that's not like a core Berkshire type of, I disagree with you. Warren Buffett, Warren Buffett spent the year 2002 and 2003 as the Fed had cut rates substantially in the wake of the dot com crash and 9-11.

He spent those two years accumulating Mohawk and companies that make carpeting and aluminum siding and paint companies and home builders. And those purchases came about a year before we had this massive housing boom in 2003, four, five, six. It was the biggest economic trend of the decade. And Buffett didn't buy one. He bought like six or seven of these things. I'm talented by Sherwin-Williams. I own it.

Yeah. So I just, I feel like that's probably the next trade he wants to express rates falling combined with not enough houses is a huge opportunity. It's a huge opportunity. I don't know the right way to express it. Maybe there's a publicly traded mortgage company. I don't, I don't know. I got it. I got it. I got it. It's the yen. He sold 90 million shares of Bank of America. So he's been blowing out of these banks. He's not as bullish on banks as he used to be. So he sold almost $4 billion worth of Bank of America. That's

7% of his total holdings. And that bank has gone up a lot like Apple. He's done obviously really well there and all the financials rallied this year. Bank of America had one of the bigger rallies. So he took profits there too and no buys to speak of. Okay, let's talk about YouTube. So this thing that I subscribed to, I saw it onceinsen tweet it.

Dan Fromer at The New Consumer did a really good post on why YouTube is television. As we know, it is the most watched streaming service in the US. 40% of all streaming is on YouTube. I'm sorry, 10% of all streaming is on YouTube. It is bigger than Netflix and everything else, bigger than Amazon and Hulu and Disney and Tubi combined. More Americans say they choose YouTube over any other streaming service. So they now say 31% that's up from 27% two years ago.

And Netflix, interestingly, 21% down from 26% a couple of years ago. And Netflix, interestingly, 21% down from 26% a couple of years ago. And this is part of the key and maybe it helps to explain some of the success of this channel and what we're trying to do with our YouTube audience. YouTube and Netflix are both entertaining, but YouTube makes two times users, two X amount of users feel smarter. So they ask like, how do you feel? Do you feel happy? Do you feel relaxed? And it's about the same between YouTube and Netflix,

but when you get to smarter, only 15% of respondents say Netflix makes them smarter. On YouTube, it's 31%. So it shows like this, and people figure out how to fix dishwashers and whatever, whatever. And then lastly, this blew my face. MrBeast generated $223 million in revenue last year

with 700 projected for this year, oh my God. And they asked the percentage of Gen Z viewers, like do they know Grey's Anatomy, do they know Squid Game, do they know Stranger Things? And more Gen Zers, no Mr. Beast, than Seinfeld and everything else. This might be a generational thing. I don't get this guy's deal

or why people are so entertained by this. Like locking people in a room with money and they have to kill each other and only one of them can walk out with them. Who is this entertaining for? I don't know. Mr. Beast aside, like YouTube is becoming indistinguishable from just television. Yeah, alright. Well, so there are sophisticated things on YouTube like us and there's dopey shit on YouTube and there's stuff for five-year-olds. There's something for everyone. So that's number one. And of course,

this is like Netflix would like to do that. It's just really hard to do that and do it well. Even Amazon, which now has hired this Mr. Beast person and his entire team, they're now trying to produce a reality show, like a game show, a Mr. Beast game show, which from by all accounts, they haven't hired any television producers. He basically brought his YouTube team to help do this. Maybe it'll work, maybe it won't.

But I think that we used to have basically three networks or four networks in this country plus HBO. We're gonna go right back there. And almost everything is gonna end up being a channel on YouTube or on Amazon Prime. It already is. Like on Prime, you could, like I have my Paramount, I have all my subscriptions.

Prime is like one of the hubs. Yeah, so YouTube's one of the best businesses in the world. If we're a standalone company, if Alphabet had ever spun it out, would have a massive market cap and a completely different valuation probably than what it gets for being inside of Alphabet. It's not quite as pristine a model

as maybe I've made people think in the past, like in terms of like, oh, they have no cost, people just upload their content. They do have costs, they have compute costs. It costs a lot of money to be YouTube, maybe more than it costs to be Netflix. YouTube is probably worth more than Netflix. Netflix is $260. Let's say YouTube is what, $300-ish? Yeah. It costs a lot to run this business is the point. And that's why there aren't three YouTubes. There's a barrier of entry here.

Google is paying for a lot of compute and paying for a lot of data and a lot of storage. It's not that simple of a business to run just because they don't have the risk that a studio takes to create content. They still have a lot of cost in this model, but it's working. I do think it's what people under the age of 20 consider to be TV. They don't distinguish between YouTube and Netflix. They just know they like it or they don't. And that's really where it is right now.

Okay. So I'm going to make the case not for any stock ETF in particular. I'm going to make the case a reminder of what risk management is. And risk management is not a formula, it's a feeling. And sometimes you have the feelings and sometimes you don't. Yesterday, you had the feelings. Everybody has their own line, which they shall not cross. And you only really know where that is when you step a little bit over the line and you discover that on days like yesterday. Yesterday is a great barometer for your own risk management. So

what I would say to you is if you woke up yesterday and said, holy shit, or you felt any sort of anxiety or negative emotion, but not just anxiety, because we all felt it, but to the point where you felt like you had to do something to make yourself feel better, well you're taking too much risk, clearly. On the flip side, if you woke up yesterday cool as a cucumber, you could probably take more risk assuming that you're not fully invested. And I think yesterday is just such a great reminder of what your own risk tolerance actually is. It's a good point.

It's not a formula, it's feel and it changes for each person over time and people learn and their risk tolerance changes because they've been through more. I think that's a really good point. If only there were some one size fits all thing that you could say like, okay, here's a formula for risk management. This works for everyone. It really doesn't. So anyway, buy more Starbucks. What was my risk? So what was my feel at the open yesterday? Do you remember? What was the first thing I slacked to you and Ben yesterday?

You were kind of quiet on Slack yesterday. What was the first thing you said? Oh, here's what I said to you. This is the dumbest thing ever? Is that what you said? I said, SVXY looks like free money. Short term VIX ETF. I posted a chart and then I said, VIX just went from 13 to 55 in a week. It's so dumb. So that was, so my attitude yesterday was really not the way that it's been.

A lot of times when we have these horrible mornings, my attitude yesterday is, oh, what are these idiots doing now? And I should have acted on it more than I did. Mystery chart for you. Okay. I'm going to show this to you on two different timeframes. And I'm telling you that it's a ratio chart. I'm bullish. Or I'm telling you that, well, I'm definitely bullish, but it's not a ratio chart. It's a spread chart.

Maybe that's the same thing. What do you think this is? Are you f**king kidding me? Okay. What do I think this is? It's fixed. And it's well, I didn't take the prices off. It's fixed income.

It's not stocks. Oh, is it the two tens? Attaboy. All right. Let's do the reveal with the other. So this is, I'm showing you, I'm showing you one year. I mean, this is clearly a situation where bonds are going higher, yields are going lower at the short end.

And the important thing that I want people to take away from this, this is a three year. We're un-inverting. Isn't that what we wanted? See the zero percent line? We're about to cross above that zero percent line and have an un-inverted two's tens. And that's when the recession starts. Well, I'm just saying, if you believe

what the Fed is saying, which is that this is normalization, that's kind of what you should want. You should want a steepening yield curve and an un-inversion. If there was like a real real real growth scare that people like, oh like we're going through a recession, the 10-year would not be bouncing as it is. It would not be 3.9. It would be much lower. Yeah, I think that's right. It would be rapidly heading toward two and a half to capture the idea that the Fed's going to have to go to zero again. So none of that is taking place.

We have a nicely uninverting yield curve, which is what you should want to see. All right. That's it from us, everybody. Thank you so much for watching. Thanks for people who made the debut live. We appreciate you. Make sure to listen to Animal Spir spirits of Michael and Ben tomorrow morning and every Wednesday morning as soon as you wake up we've asked the compound on YouTube on

Thursday with Duncan and Ben an all-new compound and friends Friday who's on and Jill is back with an all-new Jill on money this Saturday. Who's on Thursday? Yeah, it might be our might be our best show of the year. Not to brag But we will we'll put a pin in that well, we'll we'll we'll let people will there be charts will there be charts It will definitely be charts All right. Good night guys. Thank you Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ridholtz Wealth Management has the solution for you. It all starts with building the right financial plan. To speak with a certified financial planner today, visit ridholtzwealth.com.

Don't forget to check us out at youtube.com slash the compound RWM. Make sure to leave a rating and review on your favorite podcasting app. If you love investing podcasts, check out Michael and Ben every Wednesday morning on Animal Spirits. Thanks for listening.