Is This Stock Rally Rolling Over? w/ Sam Rines

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1:24And now to the top analysis of today's markets.

1:34Is the stock rally rolling over? Hi, everyone. Welcome to the Summer Friday Real Vision Daily Briefing. With me today is Sam Rines, Managing Director at Corbu. Hi, Sam. How are you? Hey, it's great to be here. Thank you so much for having me, Maggie. It's great to have you. And we are in the middle of the trading session because we've moved this Summer Friday show to one. So it's always interesting because stocks are still trading and started out certainly as a weak session, the major indices down across the board. But it's been interesting. They've kind of been coming back a little bit here as we go into the afternoon.

2:08All bets off until the last hour of trade, as we know. We'll get a real sense how people feel about going into the weekend, how they, how they, so we could see a little bit more selling maybe toward the end. But what do you make of this? What do you, how are you feeling about the action we saw today and also this week? Because it looks like they may be on track for a losing week. Yeah. So I think the action this week is actually really intriguing, kind of given all the machinations that we've seen. You had, you know, very or fairly hawkish Bank of England come out and just absolutely, you know, say 50 basis points go on a 7-2 vote.

2:44That was pretty much the tone, right? It was pretty much a, we're going to be hawkish, we're going to kill this inflation. And then we're going to probably keep going and going and going. So I think there's a number of reasons that you really had this soft tone in equities this week. Today's action, I think, is pretty interesting because you did see it come off the lows. You saw CarMax absolutely rip after a fairly good earnings report for a company that was supposed to not be doing very hot. But I think the underlying tone of equities is probably going to be pretty heavy here as you're just going to continue to have a number of headlines that aren't necessarily very positive over the next couple of weeks, right?

3:27You've got bank earnings beginning to come out. You've got a number of different, call it catalysts for pessimism. Yeah. So it's interesting. The Bank of England, we talked about that at length yesterday. And that was a real surprise. You also had Jay Powell, right, for two days of testimony over and over again, repeating the fact that we're on the inflation fight, we're not done, there's more work to do. You chop it up a million different ways, and he's delivering the same message. What part of that do you think that stock investors are paying most attention to? Because it looks like central banks are a problem, a headwind, but it's because the economy seems better than anyone anticipated, which could be good for profits.

4:15So how are you balancing that? So the way that I kind of view it is, yes, you do have very hawkish relative to what we thought a year ago, right? I think this is kind of the fun place to step back and say, where were we a year ago? We were talking about a Fed pause and the potential for a recession, significant recession last fall, right? So last summer, we were talking about the Fed being able to pause and inflation being beaten, et cetera, et cetera. And the US economy continued to chuggle long, right? We had the first revenge summer last summer, and it looks like we're going to have another pretty big revenge travel summer this summer.

4:56So I think it's pretty much the same narrative, just, you know, call it 23 instead of 22. And I think that the Fed has done a pretty good job of articulating what it's going to do, right? It's a skip, not a pause. You know, Powell said I never use the word pause, and I think that's really important, right? There's There's probably a couple more hikes and then trying to hold. And that makes a lot of sense with what we're seeing in the economy, which is services continue to boom. You know, everybody bought goods. The goods economy is not looking great. Manufacturing not looking great. That's a relatively small portion of the economy in general.

5:33And it's all about services now. And when the services economy is booming, it's really difficult to say that there's some sort of significant slowdown in the consumer. So until you really begin to see, call it the revenge travel, the revenge of the consumer begin to break down meaningfully, it's probably a catalyst for the Fed to continue to act hawkish. And it's probably a reason to not just talk, but act. Yeah. So what's, is this sustainable? I love the revenge summer. I feel like that really encapsulates how people feel. And I just talked to someone this morning and I said the same thing. Like you can still see people taking those trips that got postponed because it was like three years of trips that, you know, people had planned like family reunions and all that kind of stuff.

6:20So I guess it makes sense. It's still happening. But what is it sustainable? You know, is there enough support there for the consumer? Is this still all the all the fiscal that's working its way through the system? Or is it the is it the strong labor market? What's propping up the consumer? Because a lot of people would have thought they run out of steam by now. Yeah, so there's a couple of things propping up the consumer. One, wages are continuing to at least trickle higher. They may not be moving up as quickly as they were, but they're continuing to move higher. And the labor market is rather tight.

6:52Right. If you're if you're an employee, you're not worried about getting fired because, you know, you can find another job. Right. There's a now hiring sign on every single building, it seems. So I think it's a combination of wages continuing to move higher. That makes people feel like they can spend and knowing that they can go out and get a job no matter what. So it's a confidence that they can spend. And I think there's a couple of other things that you can look at that kind of provide confidence that this at least isn't going to end until the fall. And that is, you know, cruise lines talking about forward bookings being incredibly strong, planes being booked out, you know, trips, hotels, right?

7:34These are companies that have a fairly good view into the future with those bookings. And when the bookings are doing well, guess what? It's pretty easy to say, at least until September or October, this looks like a pretty good consumer economy. Yeah. We'll talk about what this all means for sectors and things you like and what your thoughts are after we kind of talk a little bit about the macro framework you're operating off of. So consumer looks good. That sort of services area looks good. You're also watching, we talked about goods economy, not performing, but you're also watching some really interesting trends that also sound like they're supportive.

8:15Talk to me a little bit about re-regionalization. You put that in one of your notes. What do you mean by that? Why is that important? Yeah, so at Corbu, we tend to be thematic in the way that we think. And that, at the moment, call it our number one theme, is this re-regionalization theme. It's similar to the reshoring theme, but it's really putting capital in the ground of, call it the allies, the alliance of friendly nations and not necessarily in the ground in China or unfriendly countries generally. And I think this week has been one of those weeks to really pay attention to what's kind of happening underneath the surface.

8:56You had the blue oval announcement by the U.S. government. that's the Ford SK Battery Alliance there, that they're getting a nine and a half billion dollar loan to build two factories, one in Tennessee, one in Kentucky. And, you know, that kind of, you know, hurt my interest a little bit and reminded me of this tiny little company called Commercial Metals. And it's this small company makes rebar. And, you know, rebar is boring. Rebar is not that interesting most of the time, but the company is booming. And instead of guiding that, you know, maybe this was kind of the end, you know, the CEO basically said it's going to be quarters and years of boom for Rebar as we continue to build this out.

9:42And I think that that's really something that's largely being ignored, that there is a tremendous tailwind, not necessarily to Silicon Valley or to, you know, New York, but to middle America, There is a lot of investment going in the ground for these factories, and it's going into the ground in a very, very meaningful and fast way. So that is so interesting and so important. When you're talking about rebar, and bizarrely, when I saw your note, we were talking to the editorial team. I just watched this whole PBS special on bridges. There are structurally so many of them around the world need to be repaired, which is so geeky, but it was so interesting.

10:24I just stumbled, we stumbled upon it accidentally. So there's a lot of talk about rebar there, as you can imagine, Sam. But a lot of this money will make its way to exactly those kind of projects. I mean, these infrastructure projects that have been in need, although it's so pervasive that people have been talking about, some of them are getting the money first and figuring out, okay, where do we need to spend it? It reminds me, I don't know if anyone listening remembers, casts their mind back, but when Alan Greenspan was chairman of the Federal Reserve, He used to like all these weird indicators like corrugated cardboard that was used in shipping because it was an indication of how much freight was moving through.

11:00So it strikes me that rebars are a really, really interesting thing to watch right now as this indicator of that kind of activity around. So is that the main way to do it? That doesn't trade on its own. You're just looking at these companies that supply it, right? Yeah. And it's one of the things that I really like to do. I think it's one thing to get kind of your macro from, you know, government data that's released rather untimely and gets all sorts of adjustments to it and, you know, frequently is revised. It's another thing for, you know, to get your macro from the micro and understand what's going on at the company level because the companies are the ones that are hiring people, they're giving wages, and they go to prison if they lie, right?

11:47So that to me is a really strong indication and a really good way of understanding what's going on, not just for company A or company B, but for the macro environment more generally. What are companies doing? How are they reacting to the environment? And how are they planning to react to the environment that they're seeing on the ground? So I think it's really important to pay attention to what companies are saying. I don't think REBAR is the only way to look at it. There's some other really interesting, you know, there's some concrete companies that you can look at. There's concrete pumping companies that you can look at.

12:25And, you know, they're all reporting that commercial or, you know, that industrial construction is really doing well. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

12:46It's fascinating. And this is, you know, we're always trying to talk about, we go over this in the Academy on Real Vision. We're always trying to ask people about forward-looking or real-time indicators or signals they watch for, as opposed to things that tend to be more rear-view looking and lag, because, you know, that's hard. And importantly, ask whether the Fed is watching too many of the latter and not enough of the sort of real-time indicators. So I think that's super, super interesting. So we have a question that I'm going to ask after this. I want to run a clip, though, because, all right, we've got this sort of news coming in from these companies who have to budget and plan, by the way.

13:26So I think that, to your point, great place to look for that because they're committing capital. They really have their finger on the pulse of those future orders and what they're hearing from customers. So you've got – that sounds like a very strong economic story. On the flip side, we know there are some weak spots. So Andreas, in his latest episode of Steno Signals, took a look at commercial real estate and its impact on banking. Let's have a listen to that, and we'll talk on the other side. In terms of the commercial real estate sector, I mean, structurally speaking, over the next, say, one or two years, I've remained very skeptical that this is a sector that will perform once all of the refinancing of loans will feed through the system.

14:07So who are the backholders of the exposures in commercial real estate space? If you look at the chart here, the dark blue colored area at the bottom shows the percentage of the exposure towards commercial real estate loans held by banks. And smaller regional banks actually make up a large portion of that banking exposure. So this is something to watch still when it comes to the banking sector in the US and also exposures in particular in regionals. I would be surprised if this is already a story of the past, given the amount of refinancing that we have just ahead of us in the commercial real estate space.

14:53And bear in mind that this is an issue for mainly regional banks, not to the same extent, at least not from a relative perspective for larger banks. That full episode of Seno Signals is available on our platform. If you are not a member, you can scan the QR code and come join our community. So it's such an interesting point. And we've been talking about this. We're continuing to track that as many are coming on across our platform. And there's a lot of worry around that. But Sam, how do those sort of forces balance out? Because you've got the strong fiscal, but then you have what a lot of people are anticipating to be a pretty painful credit squeeze.

15:38Because those regional banks that may be exposed, even if it's not the tier one, the big systemically important ones, those regional banks are important lending facilities for small and medium enterprises, small businesses across the country. So if you have them reluctant to lend and a sort of dampening effect there, how do those two things balance out? Wow, that trade better not come from your living room. Yeah. It sounds like it's going – that thing is going off next to my office. If you get whisked away, we're going to think we've just entered the world of Harry Potter. So you sound magical and magician-like, Sam, but if you just keep it, we'll have some real questions.

16:13So how do those two forces balance each other? How do you see that working? So I don't necessarily think that they're going to work very well together for a couple of reasons. One, the fiscal side is going to be much more of a building of the infrastructure. It's not necessarily going to be able to compensate for the lending to small businesses. The one thing that it can offset, you know, in a way is that a lot of those regional banks are middle American banks. And I think when you really look at where the footprint of some of those regionals that have the largest exposure, they're pretty close to where a lot of this, you know, these factories are going in the ground.

16:57So you may have some offsetting factor of that the economic runway of, you know, this is two, four, six years worth of construction, jobs, wages going into those communities. and then you actually have the long-term jobs being created in these factories, that you may have some offsetting factor there where the middle of America's economy can compensate somewhat for the credit issues that could arise. But I think that's really the only offset that you can really see there because it is meaningful, right? Commercial real estate offices, that is a meaningful portion of some of these balance sheets.

17:42That's going to contribute to the credit issues. And the world has changed. Not everybody's going to the office more than once or twice a week. And I don't see that changing as we move forward. Yeah, Jim Bianco has talked a lot about that prospect with us. And this is the unknown, right? This is kind of unprecedented what we've seen. So it's really hard to kind of forecast that or tease that out. So David is asking, can the U.S. have a recession when it's – this is kind of related to what we're talking about. Can the U.S. have a recession when it's running an 8 % budget deficit plus elements of past stimuli have yet to be spent?

18:19Exactly what we're talking about. For example, a lot of money from the COVID rescue programs is still sitting at the state level and being spent. So does it look like the U.S. is going to go into recession? I am not of the opinion that you see a recession in 2023, and probably not until late 2024 would be my assessment of the economy. And that's from a very high level, right? You could begin to see an uptick in, call it an uptick in unemployment towards the 4%, 4.5 % level. You could continue to see very slow GDP growth, but I don't think you get to see much of a problem in the U.S. economy with these types of tailwinds.

19:09You have the consumer, then you have the massive amount of fiscal spending that's coming through the system and coming through the system over a long period of time. I think that's really, it's going to be difficult for, call it the goods economy, to drag us into a recession for a while. Yeah. It's interesting, too, that infrastructure-type spending, public works-type spending, it seems like that would not be as interest rate sensitive, right? Because the money's already been allocated, whereas if you're looking at higher rates, we know that hurts housing. Because Warren Pies, for those of you who are remembering these conversations we've had all week, Warren Pies, we started out the week with him, was talking about really watching the construction workforce.

19:55And when you don't see that going down, it's sort of impossible for him to see a recession coming. So he's been pushing out his recession timing because he's not seeing that drop off in construction workers and the labor force of construction. But even if you see housing start to go down because of rates, if you've got those people who can roll over to sort of infrastructure-type jobs, presumably that's going to stay tight. Yeah, exactly. A lot of these jobs are fungible. You can build a house. You can build a factory. You can build multifamily. You can build industrial. They're very fungible jobs.

20:34Once you know how to do, how to pour concrete or how to set up the forms for concrete, that goes across multiple different styles of construction. So when you have this type of infrastructure building in middle America and the housing market not falling off a new housing market, not falling off a cliff like we thought it would, it's very difficult to see a world where construction jobs really lose their steam. And, you know, we've talked about it. I've talked about it with numerous people that, you know, when you have, you know, the lack of electricians, when you have the lack of plumbers coming through the system, that's a big issue.

21:17And it kind of creates a little bit of a bottleneck of sorts. So I would agree that it's very difficult to see a recession coming up in the pipeline. And it's very difficult to see, you know, a significant slowdown in construction jobs. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:43That's so interesting. So Christopher asking, Christopher, by the way, Christopher and David are having a robust debate conversation amongst themselves, which I love on the chat. But Christopher asking, the Kansas City report yesterday was lower than during the Lehman fiasco. Is it possible that players are focused on short-term economic numbers and missing a pernicious move in deflation, which will cause the economy to crater? On the goods front, I would say on the good side, on the manufacturing side, that's certainly the case. Everybody bought everything they wanted during COVID, and now everybody's traveling where they want.

22:23And that's a significant difference. And it's a differential in where you spend and how you spend. And that's being reflected in a number of manufacturing surveys. And when you look at the ISMs or the S &P survey that came out today on services, because that's still expanding and it's still adding jobs. And, you know, so I would say goods deflation, you know, that's typically what you see, right? That was the normal for the better part of a decade. And, you know, when you see goods inflation, you know, that's the oddity. That's really kind of not the way things are supposed to go, at least in the inflation data.

23:06So I would say deflation on goods, maybe, probably. Deflation on services, absolutely not. Bob, Jim, sorry, his name is Jim Bob. I always switched them and called you Bob Jim. Jim is asking, why does Sam see a recession toward the end of 2024? That's just the first time I see a possibility. A possibility. Are we back into like a soft landing conversation? Or we're not even landing. We're just like in growth mode here for the economy. We're just, you know, we're back to kind of call it that slow real, you know, or that's kind of what I always called it was slowly real. And it's probably back to that.

23:49So you're going at, you know, 2 % type real growth, maybe 1 to 2 % type real growth. And, you know, after the boom we saw coming out of COVID, that's probably a good thing. It allows supply chains to fix themselves on the goods front and allows the services side to somewhat self-correct. And then, you know, we can kind of get back to that 2 % inflation, 2 % growth over the long run type of deal. That's, you know, that's kind of the way that I see the ripples after COVID happening over the next 18 months. So if we bring it back to the stock markets, does that forecast support stocks and does it support a broadening of the rally that we saw, which has been so concentrated in technology?

24:38So, yes, I would say it certainly should support a broadening. The technology side, AI, et cetera, that hype, I think it's interesting. I'm not sure that we should have bid up everything on it. But I think when you look at, you know, companies making rebar, having amazing quarters, when you see CarMax not being as bad as feared, you know, there's a number of these underlying trends that continue to support a decent stock market. And, you know, we're all kind of like complaining about the state of the world and we're getting paid 5 % on cash and the S &P is bouncing between$4 ,400 and$4 ,500. I mean, that's a pretty good state of the world.

25:26That's worth pointing out. That's true. Yeah. So, you know, while it's fun to kind of, you know, see the wheels falling off, you know, if you're in cash, you're getting paid 5%. And if you've been in equities, you've done pretty well. So I'm kind of of the opinion that, you know, that's not a bad place to be. And as you begin to have some of the cash begin to flow back in to equities, I think it's going to be a much more, call it equitable rally in stocks as you begin to spread out who's winning and who's losing. particularly as we move into the back half of the year where you're beginning to see a lot of companies say we think we're getting towards the end of destocking and we're going to need to either restock or begin to pull up our volumes a little bit so I think there's going to be some pretty surprising data in the second half of the year kind of right along the time that services industry begins to slow down a little bit, you may begin to see some of that destocking of goods begin to become either a restocking or at least a keep stocking.

26:32That's so interesting because that sounds like sort of a Goldilocks situation that as service is cool, goods pick back up again, goods are low right now, services are red hot. If everything was red hot, we'd be completely overheating. That sounds like the ideal circumstance. A lot of people are going to say, is that too good to be true? Yeah, I mean, it might be. But when, you know, you had Winnebago, you know, the giant RV company talking about, hey, this, this de-stocking at our dealer level appears to be, you know, almost over and we're going to get back to more of a steady state type deal.