#1023 - Is This What Stagflation Looks Like? with Tom Thornton | Inflation, Tesla, & Meta

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2:05is this what stagflation looks like welcome to real vision daily briefing it's thursday april 25th 2024 i'm ash bennington joined today by tommy thornton founder of hedge fund telemetry tommy it's been too long man welcome back well thanks for having me back ash i um I missed you. And you seem really like ready to go today. You're like, let's go. Let's do this. Let's attack this daily briefing. I'm fired up, man. It's a Tom Thornton daily briefing. Plus, we had a lot to talk about. GDP, PCE, Facebook, Google, Microsoft, and Intel reporting right now at the Bell. Yeah, and Microsoft is, I'm just looking at my screens here.

2:48Oh, well, Microsoft's up 5%. Intel's down 3%. I just bought some Intel today, so oops, bad me. So it's going to be fun, and we have Alphabet coming out as well. And I think the bar is pretty high for these, so let's see what we get. So let's just jump right in, Tom. Some news that you've had some time to digest. Just Facebook reporting yesterday selling off on weaker than expected forward guidance. What are your thoughts there? What does it mean more broadly? Well, I think what happened is that the market got freaked out thinking that they're going back to their wild spending days like they did for the metaverse.

3:29And maybe they are. And look, I think that they had the currency. In other words, their stock was pretty high to be able to come out and say, we're going to spend like crazies again. And it got hit. And the market basically bought it from the lows today. And I think this is a market that people are really still very eager to buy any dip that they get. And April's been a dip. We've had a dip. The NASDAQ, the S &P are both down on the month. You have more stocks down on the month than up. And I think that is sort of telling. You have actually, NVIDIA is the sole big leader now for the MAG-7. That stock in itself has done more attribution than any other stock in the market and still is going up.

4:27You're talking now about the attribution to NASDAQ 100, NASDAQ Composite. It's a significant portion of the annualized gains. Yes. And I think it's like 60 % of the year-to-date gains, 34 % in the S &P, and NASDAQ, it's 60%. So yeah, it's a lot. And we have Alphabet up 10%, Microsoft up 5%, Amazon's up 3%. So they're jumping on board and good old Intel down. And again, I bought it today and it's down. So I am probably the only person that's ever been on live with you saying, oops, I screwed up. But it's not a huge position and things like that happen. So I'm happy to talk about my losers and often the winners.

5:25And we get to do it here in real time. Let's shift a little bit here and talk about some of the macro picture. GDP right now, print out today, weaker than expected. Let me just read these numbers to you. Consensus range 1.7 to 2.8. Actual print 1.6. Prior 3.4. Consensus 2.3. A miss and a significant decline from the rate of expansion last quarter. Yeah, it's not good for the Fed's hope to cut rates. And I think the Fed Fund Futures pushed out the first rate cut to November, the second to January of 2025. And, you know, a lot of talk about stagflation and you're probably, what are you drinking there?

6:10What is that? I'm glad you asked, Tommy. It is a double barrel, two teabag white tea. Oh, nice. It's lovely. It looks good. I should have had something like that. So stagflation, let's talk about it. First of all, it's growth that's slowing or no growth. And yep, GDP slowing, that's slow growth. You have one thing that's not working, though. First of all, the labor market typically in stagflation markets tends to see unemployment. And the labor market remains incredibly firm. We have inflation. I've been in the higher for longer camp and that inflation can stay sticky, and it has. And I'm sort of with Jim Bianco saying that most likely we're going to see inflation start to tick a little higher.

7:08And we've seen some of the components, most notably U.S. gasoline prices have started to tick higher. Nothing necessarily off the charts, but that's going to affect the CPI data. and again the labor market remains very very firm i think the average wages are going to stay high and i think the fed they may or may not cut this year and if it's november i think it's the day after the election which should get some good headlines um so to speak after the election which i can't wait till after the election so we just don't have to talk about the damn thing anymore No, we can talk about how much we hate whoever won.

7:50And I think it's on equal sides that people are like, can't we have someone else a little younger, maybe a little smarter, no tweets, no stumbling, bumbling? I think that would be what people want, but that's what we got. So I'm not going to go any further than that. Hey, let me ask you this about inflation right now. PCE running at 3.4%, significantly above the 2 % Fed. target. This is the number that they look at, not CPI. Talk a little bit about what that means. It's almost like that last mile, right? Squeezing out the last 2 % above the target. That's been the challenge here. Yeah, I think that's the issue right now.

8:33One thing that they look at is they like to look at a six-month and a 12-month type rolling period. And the six month, well, the three month is starting to tick higher because we've seen higher inflation across the board. And not in every component, but in the big data, headline data numbers. But they're going to start seeing it in the six month start to tick higher. And that's because some of the it's going to roll off from the previous months. And that, I think, is going to be a problem that the market's going to have to deal with. I've been short bonds or basically biased short bonds, and we've seen rates go higher.

9:15Today, we had 2024, the highs for basically across the curve. And I think that is going to be an issue. I mean, there's talk that next week's quarterly refunding announcement from Treasury is going to try and squeeze the bond shorts again. I don't think we have necessarily the same bang that's going to happen because positioning back in October was very off sides. You had people short bonds to the gills and short stocks to the gills. And now you just don't have that. So I think that the real risk is if we start breaking some significant levels on the S &P. and my view on the S &P is we break 5 ,000, 4 ,900, then you're going to start to see the positioning of the CTAs, those large trend following funds, macro funds start to sell.

10:10And that I think is going to be a concern because there's supply. And if we have more supply in the market selling, you know, you could see further downside. And again, the market has cheered every single week data point. If the jobless claims goes up 10 ,000 per week, the S &P is up a half percent. And so I think that data is going to stay strong and the Fed is going to be in a bind. They want to cut. We know that. We know they want to cut rates. Unfortunately, they don't have the data that can justify cutting rates. And need and want are two different things. We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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13:07Let's get to the core of this dilemma here, Tom. When you see the very weak print on GDP today suggesting that there are significant challenges with growth, even though labor markets remain strong, is this kind of the, I don't know, you want to call it the inverse Goldilocks scenario, the worst of all possible worlds for the Fed? well listen the fed has sort of tried to claim victory and that they've uh conquered inflation and let's just remember that inflation uh at three percent means it's it's prices are still going up and that's not necessarily in my view conquering inflation uh that's what economists and they think, oh, we've nailed it.

13:54Unfortunately, the consumer is still faced with these higher costs and as well, so are businesses. So they've had to try and raise prices and keep their customers. And if you go to a dinner nowadays and you take your family, you get the bill and you just want to regurgitate because the bill's just out of control. And that's the problem right now. I think that's going to weigh on the consumer. And the longer we go, the consumer is going to pare down their savings and spending ability. And that, I think, is going to be something in 2025 that we'll have to deal with. Yeah. And one of the challenges with inflation, we talk about it as a rate, right?

14:40Inflation is the rate at which prices are increasing. If you think about speed, speed, I've talked about this before, to give people a sense of just how pernicious this can be in economy. So speed, for example, is the amount of distance you're traveling at a given time, but the amount of time you're traveling matters. In other words, if you're going 60 miles an hour for three hours, you're going 180 miles. If you're going that fast for 10 hours, you're going 600 miles. This is a cumulative erosion of purchasing power so that this drip, drip, drip at 3.5%, 1.5 % or so above the Fed's target is just absolutely pernicious to consumers and, as you point out, to businesses.

15:24Yeah. Listen, everything in this world, we all expect this immediacy, but it takes time to wear down people's spending. And I think that's going to be a problem. I think higher rates that, I mean, look, we're at a two year at 5%. And I think that's, you know, you've got, where's the two or 4.7 on the 10. That's going to weigh on people's spending habits. And that's going to hit autos. That's going to hit housing. That's going to hit big ticket items and credit card spending as well. I mean, look, I think people have maxed out their credit cards and they're on the buy now, pay later, and they're buying, they're using that I've seen for everyday staples type of things as well, which is just insane to me as well.

16:15I mean, we've seen it, but look, everything's okay if the S &P is higher, right? Isn't that the way the market or the way the people look at it? Yeah, and that obviously speaks to the challenge that we have in our economy with the obsession with those equity prices, the financialization of the U.S. economy, and it being decoupled from consumers. Talk a little bit about that transmission channel that you were talking about, how higher rates translate into significantly, and in a nonlinear way, in terms of autos, housing, etc. etc. Yeah, if you try and go and you want to buy a house, well, first of all, the problem is, I mean, maybe it's not a problem.

17:00Maybe it's a good thing that people are stuck in their houses, they can't necessarily sell their house and transfer their mortgage, they can't, you know, they look at it and think, well, I want to buy a new house, we got to sell ours, which is probably no problem. But the problem is that you have less inventory, because people can't sell because they don't want to move and they can't transfer their mortgage and they're going to pay X amount more per month, which is meaningful for it. The amount is meaningful for just about every consumer. It's not like just the low end consumer. The high end is looking at it as well.

17:40And I think that is going to really put some sand in the gears of the housing market as well. So I think that's a risk. And listen, there's one thing that people have started to talk about is if, and John Williams from the Fed talked about it, it's not their base case, but what if the Fed has to, you know, hype rates? And that is something that is not talked about. And it's not my thought right now, but that could start to become an issue if things continue the way they are. Tom, what does the scenario look like in your view where that becomes a risk?

18:22If you see, and it's possible, if you see prices on CPI, PPI really start to meaningfully move, if you have a 4%, I think that's going to be a problem. You know, the low in the CPI was June last year at 3%. And if you have a year over year, you're going to have year over year comparisons. And if you start to see 4%, maybe even 5%, and I'm just throwing that out there, that would certainly get the Fed's attention. And I think that would spook the living daylights out of the market. And by no means are they going to cut rates like that. And then you're going to start to hear more about the Fed possibly having to hike again.

19:11And yeah, that would certainly weigh on the markets and spook everybody. I mean, look, the thing is, the Fed typically cuts rates when there's a dislocation in the markets. Let's say the S &P goes down 10%, 15%. Bond market dislocates and has a problem. or there's some sort of issue with liquidity in the banking system or if there is some sort of terrorism or a war or something like that, then the Fed can cut rates and they have – or pandemic, let's add that into the mix of things. Then they can cut rates and do what they need to do. But the markets aren't looking like they're going down right now, especially after ours.

20:02and uh so i think that that's going to be tough for the fed to to do it and uh again they want to cut rates we've heard that but they they don't have the data and i think you're going to probably once when the fed is out of there you know you're going to hear from the fed soon um i don't think they're going to they're going to i think they're going to sound fairly hawkish and i think that is going to weigh on the the market sentiment and it's going to be uh bad because i think rates can go higher. I certainly think rates could go higher. I think you could have the 10-year over 5 % fairly easily with a little bit more stronger data.

20:44And that, I think, would start to spook people as well. I think I put on my note today, the highs was like five and a quarter on the five-year or the two-year and a little over 5 % on the 10-year. That happens, then I think we have a problem that the Fed is going to have to deal with, and it's not what they want to deal with. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

21:19Yeah, Tom, while you were speaking there, I actually went up to the FedFRED database. This is the St. Louis Federal Reserve Bank, an index, consumer price index for all urban consumers. This is all items in US cities on average from April of 2020 to April of 2024, the last available data, which is actually last month, I guess. And the aggregate price level change has been approximately 122%, well, 122 % of where it was. So in other words, a 22 % rise, which is correlated to a 22 % decline in purchasing power. I mean, this is four years. Yeah. And that's what economists and market participants don't really – they think, oh, well, inflation has come down.

22:10Politicians do this as well. Incumbent politicians do this as well. Inflation has come way down, and it has. That's, again, the rate of change in prices. But, you know, we really need, you know, deflation would be nice. You know, it's funny because I'm long. Careful what you wish for, Tom. I know. True. I'm long a bunch of Chinese tech. I'm long Alibaba, Baidu, K-Web, FXI. And there's been deflation in China. And now we're starting to see a little bit of that reverse. So I'm not necessarily all that negative on everything out there in the world. I do think that these are undervalued. They're trading at stupid multiples.

23:01And some of them have really pretty good AI futures to them. And so I'm trying to look. I look for things that are out of favor. And just as I was on, I think I was on with you in December. And I was telling everybody how I was buying energy stocks. and I looked back at the comments and, you know, oh my God, why would you buy energy stocks? And then Q1, it was the best performing sector, even better than the S &P, the tech sector, you know, all the sectors in the S &P. So I was pretty happy with that. I did, you know, take some profits on those and I'm looking to buy back energy stocks if they would certainly dip for me.

23:45And hopefully that happens soon. All right. Talking of stocks here, I wanted to just read through this. I'm going to read this report. This is from CNBC about Alphabet earnings. Alphabet reported earnings after the bell. Here are the results. Earnings per share,$1.89. That may not compare with$1.51 per share expected by LSEG. Revenue and revenue line, it looks like$80.5 billion um and youtube advertising revenue seven and three quarter billion expected uh according to street account any thoughts on these numbers tom are you following this closely well i you know i purposely did nothing on on these i i think that it's it's also i mean i just got pinged um google's offering a dividend or alphabets offering a dividend i think that's new so people will jump into that.

24:44Alphabet was down almost 10 % the last two quarters in a row after earnings, so I think you had some skepticism there. They might be a little bit more cautious on spending than Meta, and I think that they're going to be the outright winner when it comes to AI. And not necessarily, look, I think we're in the picks and shovel stage with NVIDIA, but when it comes to monetizing it, I think that Alphabet will be the clear winner. So I was hoping it would go down because I would like to buy it, but I'm not going to get my wish and I'm not chasing it here. What makes you think that Alphabet is going to be the clear winner on AI?

25:30They've been the clear winner on search by far. So I think that they have the power to monetize search. And I think they'll have the power to monetize AI and other forms that they're going to do. I mean, they will do it with YouTube. They'll do it across the board with all their their different verticals that they're in. So I think that they proved it with search and they may do it by offering it for a cheaper price or for free. And they'll make money from it in some ways like they do with search. And I think that's the risk for some of the others, the Microsofts and others like that that want to have some sort of monthly subscription, which I don't think the Microsoft monthly subscription for their – I forgot what it's, a co-pilot or something.

26:29It is going that well, and I don't know. I'm not spending$30 for a month. It just doesn't seem like I need it. Yeah, talking of Microsoft, also from CNBC, Microsoft shares rose 5 % in extended trading on Thursday after the software maker issued fiscal third quarter results that outdid Wall Street's expectation. Here is how the company did in comparison with the consensus from LSEG. Earnings per share, 294 versus 282 expected. Revenue,$61.86 versus$60.8 billion expected. So it'd be done by earnings. These are the two companies that can pull a lot of different levers and report whatever they want.

27:17And they have so many different places that they can turn up the juice on it. And they did. And look, I'm not as thrilled. I mean, I haven't looked at the numbers and gone through everything. But I'm more excited about Alphabet, what's happened there. Again, I'm not in it. I wish I was. But I wanted it a little lower. and I'm not going to get that. And I'll be patient waiting for my price. It looks like Intel is S-ing the bed right now. And I bought it at 35. It's at 32. And so that will be my dilemma tomorrow to go through that. That one's beat down to living hell. So I'm wrong there. I like talking about when I'm wrong on things.

28:05Sometimes I get therapy out of it. But Western Digital is down as well. And that's a semi-name that I think is kind of interesting down. So Tesla's up for no reason after hours. I have my after hours stuff right here. So I kind of look at it. And we've had some fun, Ash, in the past looking at after hours. And we were joking in the beginning about the pandemic when GME was just going ballistic on the upside. I'm just watching. We were laughing at it. That was so fun. Yeah, we sure were. That was obviously kind of the best of times, the worst of times, terrible time for the world. But we definitely had fun on the show.

28:45I feel like it was just because we were just all locked inside. It was the only thing there was to do was to stare at prices on a screen and then to come on camera at like four o 'clock and talk about them. Yeah, I think it's, you know, we used to do, you know, together, live interviews together on Real Vision. And now everything seems still remote. And I like it. I like doing all the remote stuff because it's live and you're seeing things that are happening in real time. And I always talk about what's going on in the markets because I'm just a market junkie as I'm known. Talking of which, we're having so much fun here.

29:25I almost forgot to show this clip, a conversation with Peter Pankasov, a founder of Investment Charts, talking about some of the issues we've been covering here. uh google microsoft etc let's take a look at that clip yeah we've had a little bit of a snapback but we've only retraced you know 20 30 of that move so i think that does speak volumes to what kind of what's going on from a technical picture so i'm i'm bull biased on the s &p versus that you know the exact level is 49.50 on the S &P cash. I would be leaning bullish against that as long as interest rates are holding a little bit lower. And I do believe that is where a lot of the next move will be driven by if we're going to start to see the bonds start to hold up here.

30:17If this second leg up in inflation was just a seasonal tick, which very much looks to be the case. We're looking at tech earnings, just abysmal reaction-wise, not necessarily top-line numbers, but it looks like we're still going to see more layoffs, Google, Microsoft, et cetera. So yeah, I don't know if that unemployment picture is going to really clear up soon and you could start to see the deflation start to come in along with weaker unemployment numbers. Peter Pankasov on Real Vision Crypto. By the way, I should say, after that, he continues on to talk about Bitcoin, talking of which today marks the official launch of Real Vision Crypto, a new service designed to be an on-ramp to digital assets for people who want actionable research but don't want to go from zero to pro-crypto.