Who Is Winning the Trade War? With Michael Batnick (Ritholtz Wealth Management)

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3:15Yesterday, I gave you a pulse check on the economy. Today, I'm giving you a pulse check on the markets. And to do that, I'm joined by Michael Batnick, managing partner at Ritholtz Wealth Management and co-host of the Compound and Friends podcast. Michael's co-host, by the way, is a money rehab homie, Josh Brown. Today, we talk about whether the negative outcomes of the Trump tariffs and the so-called taco trade are over and where interest rates are headed. We also play bullish or bearish, and Michael tells me his take on some of the buzziest stocks of the day, from Palantir to American Eagle. Let's get into it.

3:49Michael Batnick, welcome to Money Rehab. Thank you so much for having me. I'm excited to do this. I just spilled a seltzer, so forgive me. I'm just drying my seltzer, but go ahead. Very excited. I was wondering what you were doing with like a pink blanket, a pink baby blanket. Don't ask. Okay. You're also in the middle of moving, so that's stressful. Thank you for taking the time. Of course. Thank you. Very excited. While you're moving from a 3 % mortgage to a 6 % mortgage. I'm trying to stimulate the economy. There's a lot of bad articles. I'm trying to do my part. That's rough. How does that feel?

4:25Well, it feels good because - Hang more in interest? Yeah, a lot more in interest. And I am very proud of myself that I am able to make this decision because on paper, in the vacuum of money, it makes no sense to give up this 3 % mortgage. but I'm doing it because I want to be in a house on the water. And so that's what it is. Okay. These are high-class problems. Well, moving over to the water with a higher mortgage means that you're doing really well on Wall Street, clearly. So let's start with just a pulse check of what's going on. How are you feeling about the markets right now? All right. How am I feeling?

5:04Let me do this. So a lot of conversations around the stock market are where is it going? What does this mean? What's going to happen next? I have an opinion like everybody else, but they're worthless because nobody can consistently see the future. Spoiler alert. No, but it doesn't stop us from wanting to know. Spoiler alert. But here's what I'll do. I will describe what's happening today because I think I'm pretty good at that. And then we can try and unpack and interpret the meaning of the market today. So right now, it's a bull market. Today, we should say we're talking on Tuesday. Today, the market is a bit down.

5:40It's Tuesday, August 5th. And we are a shred below the all-time high that has ever been printed in the history of the galaxy. So things are pretty good. People are feeling excited. There is a lot of speculation, whether you listen to the earnings calls of Robinhood or CMA, which is where a lot of the futures and derivative contracts are traded, or you listen to Goldman or whoever in terms of what their clients are doing, they're all saying the same thing. It's money-making season and people are getting excited and they're speculating with shorter and time horizons. Even ARK is rejoining the party.

6:20Kathy Wood's famous ARKK, which was the poster child of the 2020 euphoria. She had a record setting inflow the other day. I think it was $800 million or whatever it was. It was a lot of money. And how long this lasts, of course, nobody knows. But there's some yellow signs flashing. Right? How long does that last? Because everybody thinks they're a genius when the market is up. And by the way, we should mention that the market hits a new high, what, every 19 days? So when you hear it's like a new high in the galaxy or intergalactically or whatever, right now we're at all time highs. But markets hit all-time highs all the time.

6:59All the time. So I think there is the human tendency to get nervous at all-time highs because we remember some of the bad times and we think like, is this as good as it's going to get? Should I sell now? But what we also know is that if you were to invest at an all-time high on average, one year later, one, three, and five years later, in fact, the returns are higher than on average for investing at any other random day. And I think that's counterintuitive. But when you think about why stocks are hitting all-time highs, not always, maybe not today, but generally, it's because things are pretty good.

7:44And things don't generally turn from pretty good to holy shit, the world's ending overnight. Now, of course, sometimes it does. Sometimes you get an all-time high and then look out below. But generally, the market is not that dumb that it's making all-time highs for no reason. But then of course, like any other time, something can come off and hit us off our axis. And by definition, that's what risk is. And it's ever-present. It never goes away. and again by definition we can't know what that is because it's unknowable because we're not psychic let me tell you a funny story so when my now husband first told me he loved me i the first thing i said back was i think there's going to be an earthquake i was like oh my god i'm such a weirdo right because i thought oh my gosh something bad is about to happen like it can't be this good are you in california yes okay and i remember earthquakes and so i'm like no no no it's too good.

8:41The other shoe is going to drop. Something bad is going to happen, which is kind of what you're talking about with the markets right now. If we look back to earlier this year and the time, if you're listening to the show, by the big dip, a lot of people did. But now money is waiting on the sidelines for that to potentially happen again because the market being at all-time highs means the market's really expensive too. So what would you say to somebody who's waiting with their shackles on the sideline for something to go on sale again. Okay. That is hard advice to give, but I would say you need to have some semblance of a plan.

9:20It doesn't need to be the best plan or rocket science with all these fancy equations. But if you are sitting at too much cash and you feel like a dum-dum and maybe you're feeling a a little bit of anxiety or FOMO, take a beat, right? The market always gives you another opportunity to get in. But I would say that just blindly waiting for a pullback is horrific, a horrific thing to do because what if it's 1995 and we just don't get that opportunity and the market is 20 % higher a year from now and you only had a 3 % pullback and you're like, now what do I do? All right. So we can't control where the market's going to go.

9:58So just maybe like something as rudimentary as this. Every month or every other month for the next year, I will put in one quarter of how much I ultimately want to invest and just stick to it. Or there are programs out there where you can dollar cost average or you can automate the investments. I am always on the side of automating. Automate, automate, automate. Because I get scared like everybody else. I get fearful when others are fearful. Nobody doesn't feel those emotions. We are all human beings and we all get scared together and we all get very excited together. And so the best thing that you can do to sever that part of your brain from your wallet is to automate your investments.

10:43You know what I've been doing that actually your homie, Josh Brown, told me about, and he wrote about, I think in his book, was to do limit orders on things that you feel like you want, but they're too expensive. And so when the limit orders hit, that means the market's down. Sometimes I know the market's down when some of these limit orders of ridiculous things that I've put, I would buy whatever. I'm just saying, hypothetically, Nvidia, if it was 140 or something like that. So when these hit, it means the market is dropping, but also it means I'm getting these things that I thought I missed out on.

11:19I love that. I love that. Yeah. Josh is a big proponent of that. And I think it's a great approach. You put in these ridiculously low bids and if they get hit, wonderful. So you're basically saying that if we're in 1995, flashback, holy cow, things could continue to go up. And every time you're not putting money to work, if they're not in limit orders, which I did argue with him, that's not putting money to work. That's still waiting on the sidelines. And if those don't hit, then that's not great either. So fundamentals, we're still adding jobs, fewer than expected. Let's get into the jobs hoopla.

11:58So 73 ,000 jobs were added. The bigger issue here is all these revisions. So the numbers from May, the numbers from June were revised wildly weaker than originally reported. I think it was 132 in May to 42. That was the downward revision. And then 179 in June to 11 ,000. Like that's a swing of 250 ,000 jobs. That's the two largest downward revisions since the pandemic. What's going on? And then President Trump kicked out the BLS, the Bureau of Labor Statistics commissioner because of it. We are in the perfect storm of Wall Street narratives right now because simultaneously, we had those job numbers and a generally softening economy, which isn't in and of itself the end of the world.

12:53The economy can slow down and then it can reaccelerate. Just because you slow down doesn't mean that we're going to crash or anything like that. It's cyclical, it's noisy, But we had that really big downward revision, as you mentioned. We also, the labor market is softening and 70 % of the economy relies on consumer spending. So there's the push and pull of what's happening with the economy and spending versus, well, what matters to the stock market right now? It's all about hyperscalers and how much they're spending on CapEx. And the contribution to GDP of what they're doing was actually more than the increase in consumer spending.

13:33So that is the big question today is can the stock market survive a slowing consumer? And is it enough? Can the weight of the stock market world rest on the shoulders of Microsoft and Amazon and Meta and Google and how much money they're spending and buying from NVIDIA? And that is the$4 trillion question. And what do you think? I don't, I mean, this is boring. I genuinely don't know. I am very excited to see. I think that some of the numbers are starting to get a little crazy. So NVIDIA, for example, is about to cross the entire market capitalization of the industrial sector. And these are not small companies like Caterpillar, Honeywell, GE, whatever.

14:26These are not small companies, as well as healthcare, all of healthcare, every single Pfizer and Bristol Myers and Merck and whatever, whatever, all of them. Now, the market isn't dumb. The market doesn't just give away money or ascribe multiples that make no sense. If we are, and I should forget about if, we are on the precipice of a insane technological revolution. And I think people are too quick to think back to the last time this happened. They think about the internet bubble. They think about this ending badly. And are there similarities? Yeah, sure. I mean, it's not crazy, but is it going to go the same way where these companies are going to lose 90 % of their market cap because we overinvested and we discounted too far into the future?

15:15people like to talk about like, Cisco really did grow 20 % a year for 20 years after the dot-com bubble burst, but the stock still got killed because the market was pricing in whatever, 40 % growth into infinity. I think people over-indexed too much on the recent past, but this is it. This is the only thing that matters, like really and truly, because outside the MAG7 names, earnings aren't growing that quickly. And the stock market, the price of the stock market, it does follow earnings. It's not alchemy. It's not rocket science. At the end of the day, these are businesses and the price follows the business.

15:56You have so much pressure for seven companies. What about the 493 others? And if you're saying that they contribute to GDP, let's talk nerdy data for a second. If there's so much downward revision from the Bureau of Labor Statistics. How do we believe any data that's coming out there? How do we believe the GDP print? Okay. So a lot of this stuff is based on survey. There are a bazillion inputs. And there was a guy who responded to Tramath. I think his name was Andrew Cohn, but I'm on positive. And he's like, listen, dude, there are hundreds of economists who work here, they are not trying to lose their job.

16:40They are trying to get the data accurate. And this is a$30 trillion economy and they're trying to get it right. And revisions are nothing new. And I do think is it a very dangerous precedent of, I don't like what the data says, let's get somebody else in charge. I think that is not a good thing for the fabric of our society. For sure. They're constantly and chronically underfunded, right? So even if you get someone else in there, how is it going to be different? Oh, I have no idea. I don't know what the plan is. But I'll tell you this. I have a suspicion that we're going to do that NF non-farm payrolls, what were they were?

17:1873 ,000 in August. I'm suspecting that the data is going to get better. I mean, these revisions are crazy. This is their one job. Why are these revisions such a huge swing. I get the margin of error and the revisions and all that stuff. And we've had this forever, as long as they've existed. But these are aggressive. This person that I'm referencing, he did a study looking into the distribution of revisions, just to make sure that they're not biased one way or the other, either to the upside. They're chronically over-optimistic or pessimistic. And it looks like a normal bell curve where it really does wash out.

17:57It is noisy, but yeah, I don't have great insights as to why there's not like real-time data. Maybe all of the data needs to move to the blockchain. I have no idea. Honestly, that's like above my pay, Garrett.

18:12Hold onto your wallets. Money Rehab will be right back. And now for some more Money Rehab.

18:25A big story now coming out was the Fed's decision to keep rates steady. Do you think all of the craziness going on with the BLS could impact the Fed to cut more? Is that really the underlying story here? Well, I don't think Powell will be bothered by what President Trump decides to do with these commissioners. But the market is pricing in more rate cuts, which is probably a combination of the fact that Powell's term is almost over. And also, in my opinion, and I'm not an economist, I think the Fed should be cutting. I think that one of the key pillars of this economy is the housing market. And the housing market is absolutely frozen.

19:09If you look at existing home sales, there's no activity going on because people are stuck. They can't afford to move. They're stuck in their mortgage. and that's a huge part of the economy. And so we're very lucky. Yeah, they're not like you. Right. Going from a 3 % mortgage to a 6 % mortgage. So I think rates should be lower. I think the economy is also slowing down. The two-year is significantly below Fed funds rates. I think all indications are that we are a little bit too restrictive. And I think that people would tell, Michael, what are you talking about, dumbass? Look at Fartcoin and all this other speculation.

19:39That is on the margin and that is not, I hate to break it to you, that is not what the Fed is looking at to determine the appropriate level of interest rates. Yeah. I cannot imagine Jay Powell looking at fart coin as one of his important indicators. No, it's not an input, believe it or not. But you and I have seen a lot of earthquakes. This is not our first rodeo at the ups and downs of the market. When you cut rates to rock bottom levels, the nostalgia that people have for that, it worries me because when rates were that low, the economy was hanging by a thread. Those were emergency measures.

20:17It's not funsies to just take rates all the way down so that we can stimulate an already healthy economy. When you do stuff like that, the economy is weak. It's sick. It's not healthy. Wait, what's funsies? I don't know what that word is. For funsies? Yeah. I don't know what the right level is. I don't know if it's three and a half percent or three and a quarter, whatever. But I think we're too tight. And I totally agree with you. A lot of the behavior that we saw in the ZARP era of zero interest rates were pretty gnarly and dangerous. There was a lot of economic distortions. I think the consumer benefited a lot from it because Silicon Valley and a lot of these venture-backed funds were funding a lot of non-profitable ventures, like Uber being one of them and Tesla, not Tesla, a lot of others that like the consumer was a huge beneficiary of.

21:07And that's bigot is off. And I think that's probably for the best. I agree on that. You guys had an episode last week talking about Wall Street, basically saying that Trump is winning the trade war. The taco trade is over. If somebody again is sitting on the sidelines with some cash thinking that we're going to see another dip with the uptick in tariffs again, what do you think is going to happen there? Can you talk me through the case that Trump is winning and the taco Trump always chickens out. So I think the talk last week, and honestly, I don't know about you, I'm sort of over tariffs, just in terms of not that they don't matter.

21:48They're not over. Not that they don't matter at all. And they absolutely matter to a lot of small businesses. So I'm not trying to minimize it. I just mean in the general discourse, I personally am tired of talking about what is he going to do? Will he or won't he? Once a lot of these measures and levels are actually there and we have some data that we can revise and revise again and then get to the bottom of it, then I will be curious to see what the impacts are. But it seems like so far the market is looking past it because what is driving the market, earnings, and certainly the narrative, it's not anybody who's reliant on steel or whatever other imports are going to be tariffed.

22:28It's the MAG-7 and that's it. That's all the market cares about right now. And it won't be that way forever, guarantee it. But for right now, that's what matters. Yeah, but closing these trade deficits is bringing in trillions of dollars to the US. It is? For funsies, for free. Okay, maybe it is. Is that a stimulus? That's not a stimulus? Okay, so the federal deficit, these are taxes. It's a tax on consumer. And so the more liquidity that you take out of consumers' pockets, I don't know how that's stimulative. And so the deficit goes from whatever trillion to a little bit fewer billions. I don't know.

23:06I am not one of those people that are particularly concerned about the deficit. I think a lot of that is fear-mongering or a basic misunderstanding of how the economy works. We've almost always had a deficit, and it almost always has never mattered. Okay. So why are you over tariffs, even though pharma tariffs could now go up to 250 %? All of this is a big deal and has ramifications on - Oh, it is a big deal. I'm going to say for me personally, as somebody that is commenting on the market, I don't care that much because I am not an expert on what the levels are going to be, what the ramifications are going to be.

23:41That is just not my beat. And I just don't care to talk about it that much. It's not that I don't think it matters. Of course it matters. Okay. What do you want to talk about then? What if we not focused on? Is there something that has been overshadowed by all the tariff news, by all the data news? What should we be focusing on in taking a closer look at? What is capturing your heart and attention? All right, let me give you an answer or a non-answer. My non-answer is nothing is overshadowed. There is so much noise out there that if there is a story, it will be reported on. One of the things that's been popping up lately is like, there's just too much money.

24:17The upper class has too much money. Airport lounges are full. 3 million is the new 1 million, whatever it is. I think one of the stories that is perhaps a little bit uncovered because I just don't know that it's that sexy or exciting. First-time homebuyers are getting royally fucked. If you were saving money because you used to think that a house that you wanted cost$600 ,000 and you were working for years with your partner to put away$150 ,000 to get into the house, and now all of a sudden you have to put away $250 ,000 and the mortgage payment is out of reach, I think those people got a super duper raw deal.

25:05And that is maybe not spoken about enough, but I think that the distortions in the housing market are seriously sending shit haywire. So meaning what? What does that mean? Let's pull the thread on it. All right. One of the things that we've been talking about, and I don't know how to quantify this because the stock market is so large that these dollars that I'm talking about are a drop in the bucket. But we have gotten a lot of emails from people that are tired of sending in a money market fund for a house that they're never going to be able to afford and are tired of watching the S &P 500 compound at 15 % while they do that.

25:42And so a lot of these people are taking money out of what would be a very conservative bucket and putting into the stock market. But what's wrong with that? What if they're then renting and then they're making more returns in the market than they would have with their house. Well, so that is a good question. What is wrong with that? Nothing. In fact, I think it's phenomenal that somebody's like, this is the best thing ever. I had$150 ,000 that was sitting in cash that would have been$151 ,000. And now it's$195 ,000. I love that. I think that's incredible. But a house is not an investment. It's where you live.