Expert Trader Says Stocks Are NOT In A Bubble

0:00What's going on, guys? Today, we've got a great episode with Warren Pies. He's the co-founder of 314

0:39before we get into today's episode please remember my goal is to get to 1 million youtube subscribers and i need your help to get there hit that subscribe button and let's get into this interview all right warren i thought a great place to start the conversation is you guys have kind of a macro shift that you guys have been writing about for a very long time it's this whole idea of debt Deflation is kind of the old world view of what's happening in financial markets. Now we are moving to a currency debasement view. What does that mean? And why is that your view as to what's happening right now?

1:08Yeah, it's really a mindset shift amongst investors. And you have to go back to the great financial crisis, the GFC, which occurred 2008 to 2009 to track the evolution that's going on. So coming off of the GFC, that was all about debt deflation. And that was the mindset that permeated the investor base at that point in time. Because, I mean, obviously, we had massive drawdowns on the S &P 500. It took years to reclaim those highs. And that was all about having too much leverage. And so the focus, the psychic concern of your average investor was, we need to protect principal. We want to protect drawdowns.

1:45And that has been the mindset. And we believe, though, that COVID really brought us out of that era of investing. And it brought us into what we're calling the debasement mindset. The debasement mindset is really marked by these large pro cyclical fiscal deficits, meaning that the government is spending, is doing deficit spending, which is really just money creation, the most powerful money creation you can have into a strong economy. And so that's changing things. And what's happening is it's filtering down to investors. And the new psychic concern is protecting principle, I mean, protecting purchasing.

2:22power, which is really just like guarding against asset debasement and monetary debasement and asset inflation. And that's the transition we're in. I think it's a process. It's just like the GFC mindset, the deflation mindset that marked those years lasted for 10, 15 years. It's a decade plus secular change we're watching. And you can see it happening in real time and you can see investors starting to wake up to it. So you guys have this incredible research piece that you put out. It says from deflation to debasement, you basically go through this entire kind of mindset shift. But one of the big conclusions from the research I want to read is this era favors equities, gold, Bitcoin, and real estate, which I think on this show, we've been talking about nonstop for the last couple of months.

3:11And you say dips are short-lived as investors are learning that protecting purchasing power is paramount. So let's take those two things, right? The first is equities, gold, Bitcoin, and real estate, they all are inflation hedges, right? And you think that that is really where the investment returns are going to come from moving forward for the next five to 10 years? Yeah, I do. And I think the key is going to be that blob of liquidity is going to shift around at different points in time. And you need to be able to identify the asset that it's going to ahead of time. But broadly speaking, yes, I think those hard assets, the basement assets that we've listed out.

3:45And I think equities are in there too. along with Bitcoin gold in real estate, because equities, if you look at it, S &P earnings generally, and especially over the last couple of decades, have tracked above inflation. So that's a way to protect purchasing power as well. So yes, that's the big picture view over the next decade in our view. Now, equities being in there, I think when people hear hard assets, they obviously think of the gold, the Bitcoin, the real estate, et cetera. Equities, one of the things that I have been trying to communicate to the market, which I think you're saying here as well, is they now have become somewhat of an inflation hedge.

4:21People are actually going into equities to outpace that inflation rate. That begs the question, if people are adding a monetary premium to stocks, does that now negate or significantly mitigate the importance of historical valuations? Because now you have your corporate valuation, plus you've got this monetary premium on top of it? I think so. I think that that's one thing that's happening. I think there is a monetary premium. I think that there's a scarcity of S &P earnings, which is kind of like, that's another way. That's the way I've talked to our clients about. It's kind of weird, but it's like, those earnings are very powerful and valuable to investors.

5:03So getting that stream of income is attractive in the debasement world. But I think the other thing that's happening is that the underlying shift within the market, more tech firms, fewer cyclical firms, higher margins, higher quality companies in general. We've done a lot of work on the valuation question. We actually came out with a report last year and said, look, we think the S &P 500 is headed to 7 ,000 by 2026 as long as we get the earnings that analysts are baking in. If we get those earnings that we're going there. And the real kicker was not that this is just some prediction is that we think the S &P will go to 7 ,000 by 2026, which we're obviously on the doorstep of at this point in time.

5:48but it wouldn't be overvalued based on where margins were going, top line was going and what we thought a reasonable multiple on sales and earnings were at that point. So it's playing out. You're getting that monetary premium, but you're also just seeing the shift in companies in the higher quality market getting reflected. And you're seeing more people who are backing away from the idea that, oh, this is a bubble and they're starting to wonder, I mean, maybe we're not cheap as a market. I don't think we're cheap, But is it a bubble? No, I don't think so. You said scarcity of earnings. I've never heard anyone say that before.

6:23Is that just a thought process that 10 companies in the S &P 500 are really driving the entire index? Or is there some other way to think about scarcity of earnings? I just look at it as it's a way to, again, it's a mindset shift that we're trying to train our clients on. We have these conversations from time to time. And I just look at it as there's an asset scarcity and there's a monetary glut. So we have too much money chasing too few assets. And so obviously it's easy to think about Bitcoin because the supply expands, for instance, only so a little bit over time where it's a fixed supply at some point.

7:04And the gold is you have to mine it. There's only so much gold supply that comes online. You have real estate, which is obviously, you can develop new real estate, but prime real estate, they're not printing any more waterfront property, for instance. So one way that you can kind of think about this debasement mindset when it comes to equities is this is a valuable stream of income with moats that protect that income. And the S &P 500, for instance, high quality companies that cannot be replicated. And so that's an asset. That's a debasement asset. I think of that stream of earnings as a debasement asset and in the same vein as real estate, gold, and Bitcoin.

7:49Now, one of the things I do not see in your list of things that should do well between equities, gold, Bitcoin, and real estate is bonds. I have been fairly negative on bonds. I look at things like TLT just getting smacked for the last five years. I think you actually have a more optimistic view of bonds as an asset moving forward. Talk about how you see those performing and maybe their place in a portfolio. Yeah, I think that's a big mistake. Some people will go all the way to the debasement. They'll adopt it. And then they'll say, we can't, we just shun bonds in general. And I don't think that's the right approach.

8:24I think bonds are going to have a time and a place in this world too. And they actually are doing things within a portfolio of assets that I think is very valuable. And so, yeah, we've been basically bullish on bonds and thinking yields were heading lower throughout this year. And that's come to pass. We're not raging bulls, but we think that that's the general direction of yields. We think we're in this kind of, even though it's a debasement mindset and inflation is higher than it had been post or pre-COVID, our view is that this is a cyclical period of disinflation. So you have things like we knew oil, we expected oil to be weak.

9:04We expected the labor market to soften up this year. And we expected shelter inflation, which is about a third to 40%, depending on which metric you're looking at of official inflation statistics. So when you give me those three disinflationary tailwinds, it's difficult, even with the tariff things and everything that's happened here this year, it's difficult to get too negative on bonds. And then you have the Fed that's going to be cutting rates. Everyone wants to say, well, the Fed doesn't control the mortgage rate or the 10-year or the 30-year or whatever, but there's a relationship. You know, if the Fed took, as the Fed takes rates down in general, what we've seen over previous cut cycles, if they cut rates by 25 basis points, you see the two-year yield fall by 17 basis points.

9:51You see the 10-year yield on average fall by 10 basis points. And what happens consequentially is that you get a seven basis point bull steepening in the yield curve. I think it'll be a little bit more of a steepening, more stickiness out in the long end through this cut cycle for all the debt dynamics that we're talking about. But the bottom line is there are a lot of fear mongers out there who are saying, oh, rates are going to 5 % or 6 % on the 10-year immediately. That's not going to happen. I just don't see that happening. One day within this cycle, it will, but it's not right around the corner.

10:25So the other part of the paragraph that I read to you earlier was dips are short-lived as investors are learning that protecting purchasing power is paramount. One of my core beliefs now is prolonged bear markets or prolonged recessions have essentially been outlawed. There is no way that we are going to see an 18 or 24 month recession, mainly because the central bank seems to have a playbook that they have perfected that if we get some sort of market weakness, even though they may say they don't look at stocks, they are going to step in with monetary bazookas to push us back. Is that similar here where like the buy the dip mentality specifically coming from like the retail community is actually a pretty good investing strategy?

11:05Yeah. I mean, I think there's been a... Now, you have to be careful because at some point, the market's going to zig when you zag. But I think for now, this is the world that we live in. The buy the dip meme has taken hold of the retail mindset. I saw it during the Liberation Day sell-off. I remember going to my son's football games on a Friday night, and then the parents would kind of shuffle over to me as the market was selling off. And instead of being really concerned about losing money, they were expressing, I wish I would have bought more of this or that high-flying stock at the lows. And so you could see it right away, like they were ready to buy the dip.

11:48And retail led us off the lows, which is totally, it threw a lot of people on Wall Street off. You don't usually see, retail is usually not the aggressive early entries into a bear market that pushed us higher and then wall street has to chase what happens is usually wall street is savvy they buy the dip and then retail chases and they're the bag holders that you offload to that's the that's the the thought process historically and we saw that inverted through this uh sell-off and i do believe that's part of this debasement mindset it's because you're seeing people say i need more of these debasement assets i need to i i missed out on some of the stock rally i need some of that i need some gold i i need these things in my portfolio and i in and so yes i think it shortens up the uh the uh this the drawdowns they're maybe sharper you do have a lot of like vault control funds so they you know volatility begets selling in this world but um yes i i agree with you and the central bank obviously you know fed funds rate still a lot of room to cut and we're still doing qt ultimately so there's a lot of room for the fed to uh sort support the market if something really bad happened.

12:57One of the things I've been fascinated by, so everyone knows that off the lows in April, whatever, 33 % to 40%, depending on the day. But I saw a stat from Opening Bell's Phil Rosen recently. And what he said was, if you take out April 9th, the returns, it's the best day of the year so far. You take that out, the difference in return, buying January 1st to today, 14 % if you stay fully invested throughout the entire year. If you just missed April 9th, your return drops to just under 5%. And it feels like there is this world where there's hypervolatility, there's a lot of kind of chaos and uncertainty and like all the noise that we are getting and the gyrations in the market almost are making more of an argument to just buy great assets and hold them forever.

13:44And like maybe Buffett was right to a degree. Yeah. I mean, the big rules, so like we can get deep into the data and we can talk about different measures of the labor market and how wealth effect is flowing into the economy. And this is what we do as a macro shop. But you ultimately have to have actionable rules that you give to your clients. And one of the actionable rules that we have for our clients, and I think it's expressed, it shows up in the stat you're talking about, is in a debasement world that we think we're in with these high, large deficits, pro-cyclical deficits. You can't be underweight stocks unless, number one, you have a really strong opinion that a recession is coming.

14:23And we already talked about how recessions will be harder to summon in this world. Or number two, you think the Fed is on the verge of tightening versus stimulating the economy. If you don't have either of those factors, you can't go underweight equities, can't be underweight equities. And that's for the exact reason you're talking about. You're going to miss those drawdowns will be sharper. And then the rebounds will be sharper. And if you miss that rebound, it's going to ruin your year. Now, let's talk about the stock market. One of the aspects that I think has really confused what I consider the smartest, or I'm going to put that in air quotes, the most sophisticated, the most intricate in their analysis, is this idea that the job market is seeing tons of weakness.

15:07And you see the Fed saying, hey, we're going to cut rates and we're going to blend the labor market, all this stuff. But actually, we're getting companies that are seeing their revenue and profits accelerate, they're just doing it with less employees. And I think people broadly say, hey, that's like the AI trade to a degree. But maybe we can actually get stronger companies, more efficient companies, more valuable companies, but at the same time, see this labor market weakness. And so for an investor, how do you start to kind of think through the data that you're looking at is the same data, but the reasons why the data is changing may actually have a lot to do with this technology innovation that's happening in these large businesses.

15:42Yeah, I think that's the$64 ,000 question that's out there right now in the markets from like a macro standpoint. Is the weakening we're seeing in labor statistics, is it something cyclical or is it something structural? Is it something the Fed can fix by lowering interest rates? Like if they could get the mortgage rate down to say 5%, would you see some of those things stop some of the bleeding in the labor market? Or is this just a secular change where companies are going to, and I think the honest question is it's a little bit of both. It's a little bit of both. And it's good for asset holders.

16:17I think people are picking up on this. That's why, again, we're in this debasement world where there's some negative knock-on effects for society in this world because the owners of assets benefit. And the AI is exacerbating this somewhat. So the owners of assets benefit where if you're not owning and you're just a laborer, You're competing now with AI and all this other deflationary, disinflationary technology. And so that's going to be something to watch. I don't think it's an issue for tomorrow, but it's something to watch as we move through this era is how does that AI, you throw AI in this debasement mix and asset owners just continuously separate from people who don't own assets, what happens to society underlying that?

17:04So I think the answer is it's a little bit of both. It's too early to tell exactly what's driving all of the – and it's different parts of the economy. The answer is going to be slightly different. But, yeah, it's a little bit of both right now in the lower market. Let's talk about the actual economic data itself. Obviously, there's been a bunch of controversy with the BLS and the president firing the head there and who they're going to nominate, whatever. I've really focused, I think, mostly on the inflation metric and just the fact that it seems to have really kind of suspect methodology. The collection seems kind of outdated.

17:40You now have people in the private sector who have created alternatives like a truflation that's more kind of real time alternative metric. How do you, as a research analyst, think about, you know, if I'm looking at bad data, of course, my conclusions are probably going to be inaccurate. And so I need to really focus on like, what is the good data? And do you have concerns about the government's economic data? Do you have alternatives? Like, what do you guys do, given your job is to, you know, try to figure out like what information is the right information to look at? that's um sometimes the the thing i would start with is say you can't let the perfect be the enemy of the good and we have the best data in the united states i know there's like it's being politicized right now and there are ways that could probably be improved but ultimately you don't want to throw the baby out with the bath water this is we have good data now this leads to an interesting point like sometimes people say why do you call it a basement trade versus an inflation trade.

18:37And I call it a basement trade specifically because I want to keep that concept separate from the CPI. CPI is CPI. It's not necessarily inflation. I think we do a decent enough job of trying to track it. I mean, there's some weird things in the methodology, but it's all stated. I don't believe that there's not some grand conspiracy. It's a tough job to measure inflation and economy like this. But I do think that the CPI is not a real reflection of what's happening with inflation. It's not a real thing. It's a different factor. And we have to understand the CPI as a standalone factor given our work.

19:15But CPI could be at 2.5 % or whatever it is, and debasement trades are raging because they're not the same thing. And that's why we named it debasement versus inflation trades. But yeah, so yeah, I think there are concerns. I don't want the Trump administration to fill the baby out with the bathwater. That'd be my message to them is that, hey, we have pretty good data. I don't like the idea that we would have companies reporting less than four times a year. I don't like the idea that we would scrap the BLS data just because there's been revisions. I don't think it's been anything targeted to the Trump administration or to Trump himself.

19:51I mean, we saw negative revisions under the Biden administration. We've seen negative revisions under the Trump administration. This is something that happens when you get into the later parts of the cycle and you're kind of starting to see growth decelerate. And we have, there are issues with the birth-death model and things that are technical within that, but those are, it's no conspiracy. It's just, it's messy to pick, to collect data on this size of the economy. Now, I want to read you something that you guys wrote around inflation that I thought was really fascinating. You said, we categorize ourselves as open-minded disinflationists.

20:23And then you go on to talk about, there's really these two different viewpoints in the market. There's like re-acceleration and de-acceleration. And you guys, I think, rightfully call out the fact that basically it's inflationist first, the people who think inflation is not going to show up. Open-minded disinflationists. Explain what that view is and whether you think that there is going to be some sort of inflation that people need to worry about in the coming months. Yes. So there's so many different ways to answer the question. Number one, secular versus cyclical. So secular view is multi-year view.

20:53When you say the word, I don't know if your audience gets that or not. And cyclical is more like six to 18 months. In over a six to 18 month period and through this year, we've been in the camp that the disinflationary tailwinds, lower oil, weaker labor market, lower housing inflation, which we can kind of model out easily, which is a huge part of the CPI, tells us that it's going to be contained. CPI is going to be contained. The other side, the goods inflation we're getting is tariff based. And I think that the doves on the Fed have won the argument to look through that. And so you're seeing that from represented by Chris Waller in that wing of the FOMC.

21:34And you're seeing Powell Appiah somewhat now too. So my view is that inflation in a way that's going to throw the Fed off course is not a risk for the stock market right now. I also don't think that there's another group that says, hey, we're having an economic reacceleration, like a true reacceleration. They point to retail revenues and some of the things you're saying. And I think that it's more of an ephemeral boost to some of the areas of the economy right now due to the wealth effect, which is by its nature, somewhat ephemeral. And I don't think it's a real structural change in the direction of the economy.

22:18I don't think we're going, not yet, maybe next year when we get some of these tax breaks and if the deficit expands. But for now, I don't see the data that we're getting right now showing a reacceleration of the economy. So when you boil all that down, our view has been and remains that we're in this soft landing, muddle through kind of world where some areas of the economy are doing well, cyclical areas of the economy like real estate manufacturing are somewhat depressed. And the net net is very positive for asset orders. I mean, this has been an incredible year. We did our chart book, our Q4 chart book last year.

22:55And every single, I don't know if I remember a year like this, every single asset class, We tracked like 20 different assets, broad asset classes, was positive on the year. It includes fixed income, includes equities, includes precious metals. So yeah, this is the Goldilocks economy for asset holders. And that's what it means to be an open-minded disinflationist. Why am I open-minded? Because I know at some point inflation is coming back. It's going to come back. Those disinflationary tailwinds are temporary. And we have to be on our game watching for when the inflationary issue starts coming in.

23:33And if it were to take the Fed off its cutting cycle, it could be kind of a nasty period for stocks and risk assets. One of the other aspects of the economy that I don't hear a lot of people talking about, mainly because it starts to touch on all this political nonsense and noise. And I find myself realizing that this administration in particular is making a lot of political changes that are having an impact on the economy. Some are explicit economic policy changes that are pretty radical from where we were. Some of them are political decisions that then have kind of an impact. And the immigration stuff seems to be something where people see it happening.

24:09They're explicitly saying that they are going to deport a lot of folks. They're going to close the borders. And I think there's a lot of folks who frankly voted for that, right? And so put aside the political part of it. What is the impact on an economy when you start to take people out of the workforce, right? Forget for a second, you know, legal or illegal immigration status, just like you have X number of people in a workforce and you start to take some of those out. Now, if it's a very small percentage, maybe it has no effect. But I think the ambition here is it's actually a material percentage, right?

24:40And so have you guys done work or seen any analysis that kind of resonates with you in terms of how investors can think through that type of stuff? Yeah, that is another – when you get into this institutional macro world that we live in, that's another one of the big questions. Like it's – there is not settled – there's not a settled answer. What we know happens is that as immigration slows and as the pool of potential workers, that supply side comes comes down, then the break even the amount of jobs you need to create in the economy to keep the unemployment rate constant starts to come down. And the argument right now is over where is that break even rate?

25:19You know, some people think it could be as low as we don't need to create any jobs. We're losing so many workers that we don't have to create any jobs to keep the unemployment rate constant. Some people think I mean, consensus is it's more like 50 ,000. So we went from 150 ,000 job break even during the Biden era immigration surge to 50 ,000. The truth is, we don't know. I don't think anyone knows for sure. It's definitely lower. And it keeps the unemployment rate lower than it would be otherwise. And so that's the ultimate effect. So you could have some slowing of the labor market and the supply side demand.

25:54demand is slowing with the for jobs and for hiring which i know we're seeing and the unemployment rate doesn't spike and that's the big takeaway so you have to be we the words we've been using which is kind of uh there it's it's a little tortured is that this is a a malignant stasis in the labor market and and the reason we called it that is because last year when the unemployment rate was rising due to all the immigration immigrants coming into the the labor market we called that a benign loosening. So this is more of like, hey, unemployment rate might not be rising, but it doesn't mean this is a healthy labor market right now that we're on the edge of something that could look much nastier.