Will the Fed Force a Stock Sell-Off? with Dave Mazza

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1:24Will the Fed force a stock sell-off? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Dave Masa, Chief Strategy Officer at Roundhill Investments. Hi, Dave. Welcome to the Daily Briefing. Hey, thanks for having me here. I love it. So it's your first time with us. So before we jump in, why don't you tell us a little bit about Roundhill and your remit there? Yeah, no, happy to do so. So Roundhill is a registered investment advisor, primarily focused on offering exchange traded funds. And really what our focus is as a firm is trying to do things a bit differently. The firm was actually founded in 2018 by the then 29-year-old Will Hershey and Tim Maloney, who had worked on Wall Street and became a bit disenfranchised with sort of the force feeding of investment products and the general stodginess of it and really not a focus on a younger generation, millennials, Gen Z, and things of that nature.

2:20And since that time, really the firm has focused on delivering first-to-market product on really exciting, innovative areas. So first-to-market product on sports betting, the metaverse, the ticker of that is NetV, and then most recently, a generative AI ETF, the ticker CHAT. And my remit as the chief strategy officer, I recently joined actually in February after spending time at State Street Global Advisors, Oppenheimer Funds, and then Direction, is to help expand the firm and really where we're focused, both from a product development standpoint, a research standpoint, both macro and markets, and also from an operations point of view.

3:02So it's a really exciting time for Roundhill, and one where we're hoping to take our ability to sort of be nimble, try to outsmart some others, and then bring some exciting products along the way. Yeah, and there's certainly been a huge amount of momentum, especially around AI. So we're going to talk a little bit about some of those themes, but you've got some banks and deep value too. So I want to talk a little bit sector specific in a moment, but we've got to start big picture, So we had very interesting market action today, a big move in bonds after the ADP reported much bigger than expected gain in private payrolls in June.

3:38It was kind of a jaw-dropping number. The two-year yield jumped to 5.12%, a 16-year high on fears the Fed's going to have to be more aggressive when it comes to hiking rates. We had Fed Governor Logan say as much today. They've all been saying it. We heard it in the minutes. They've been pretty consistent about that. And we did see stocks sell off, although interestingly, stocks bounced off their worst levels and have been sort of making their way back, recovering a bit as the day went on. So it's still a down day, but not nearly as ugly as it could have been. So when we put this all together, we've got a big monthly job, government jobs number tomorrow.

4:14How are you thinking about the macro landscape here, Dave? Yeah, no, you said it really well. It's a really interesting picture here, because if you were to look just at some of the economic, some, you'd paint a really bearish picture. And I think that's one where many people heading into this year were generally bearish, particularly on equities, because looking into the future, whether it's the earnings recession that actually we're in. And we can talk about that shortly, particularly with earnings season coming up in short order and then certain data. But look, the jobs market is just so dang resilient.

4:50The ADP number, another blowout number. And of course, the bond market reacts accordingly. But what's interesting here is it makes you think back to the FOMC meeting. What was this sort of hawkish pause or skip? Especially now, it seems pretty clear we're going to need to get some action in July, if not more. They've come out basically everyone to your point. Any governor that gets a chance to talk these days is alluding to that or basically saying it. And I think that's something that markets are now repricing. On the equity side today, again, there is a bit of a bid here, which when I think about what's going on with market sentiment, it makes me maybe be less bearish than I want to feel because the data is actually sort of telling me, hey, there might be something here.

5:35So really, the picture actually remains a bit challenging to sort of come out and just say, I want to be uber bearish or uber bullish. Yeah. So ADP is notoriously a little noisy, right? And a lot of people talking about, are there the seasonalities off here? A lot of it was in leisure and hospitality. Is any of the data working because we had all of these sort of extraordinary events with all the stimulus of the year-on-year so hard? People are a little bit confused. Do you think that we don't have a clear picture, or does it seem like the U.S. economy is actually reaccelerating? We know manufacturing is weak.

6:14We know that. But is the rest of the economy just stronger and more resilient than we thought? Or do you think maybe there's some noise here in the reports that we're seeing? Well, at least from my perspective, I think there's truth to both of that. We still have this overhang of the COVID times where rate of change numbers and year over year numbers. It's still relevant, but you just can't maybe discern as much from some signals that you could have previously. So I will acknowledge we're still seeing some of that. In particular with this ADP report, yes, always noisy. There's this massive catch up on leisure and hospitality.

6:53Some would say that's actually lower quality jobs, you know, without getting into a massive discussion about what's a good job or a bad job. To me, they're on the payroll. It's a positive on one hand. On the other hand, this jobs number coming out tomorrow, I think is, you know, every jobs number is important. It's probably one of the most overused terms on Wall Street. But what we may end up getting is another beat. And then the market's going to say, hey, we have to reprice further hikes and higher for longer. That's something that I think even equity market bulls weren't sort of, I think, realizing that, that I don't think the Fed is going to be in a position anytime soon to be pivoting and cutting.

7:39To me, the pivot had been to higher rates and higher for longer. So while there's noise in the data, we do have to discern something. And there is some interesting things that came out today. Services, which were starting to look pretty weak on a deceleration basis, did OK. And so that, I think, tells me that, yeah, it's not a cut and dry picture where manufacturing, China, a lot of question marks of what's happening there. But the services side of the U.S. economy is showing some strong results. At some point, the piper needs to be paid, right? Rates are extremely high. You know, look at the prime rate, 8.25%.

8:19We cannot ignore that. But if the jobs are still there, you can kind of kick that can out for some time. Now, just like there was that debt maturity wall people were talking about in corporations a few years ago that got pushed out, I actually think the same thing is going to happen with the consumer. So while many people were saying, hey, this is going to have to happen in 2023. maybe even early 2024, I think, again, we see this moving further out as part of this idea of a rolling recession. Yeah. And I think that for about three days last week or something, everybody thought like, oh, maybe this is, you kind of felt that soft landing sneaking back into the conversation.

9:02And Julian Brigden, who was on yesterday, was joking about the immaculate recession. You know, that's like somehow this happens, but it all moves so slowly that policymakers can wrap their head around it. But Julian, who's co-founder of MI2 Partners, in the extended part of our conversation yesterday, kind of made the argument that if it actually runs hot or re-accelerates, that could be a problem and that maybe both stocks and bonds are underestimating the Fed. Let's have a listen to that clip, and we'll talk on the other side. Bonds are actually acting quite logically, right? So as I said, the curve is inverted.

9:40That bit is very logical. We're just sticking with this very hawkish Fed perception, right? So two-year yields are basically a function of what the Fed tells you they're going to do. Now, there is actually where I will say the bond market could be wrong, and this actually would be bad news for the real economy. it may not be, it'd be bad news for certain companies within the equity market, is if this equity market doesn't back off and we keep getting strong data, then these rate cuts, remember, we're pricing in humongous rate cuts, right? We're pricing in basically - They pushed it out though, right?

10:22575, Maggie, right, is the top-ish, 550, 575. And then December of 2024, we're going to be, so 18 months from now, we're going to be at four. How do you get that without a swinging recession and an equity market meltdown? So right here, right now, if you want to trade, you probably want to be short bonds and short stocks because one of those has to give. Just a quick moment to remind you, today's Real Vision Daily Briefing is sponsored by CraneShares. Learn about their KRBN ETF at craneshares.com forward slash KRBN. Now back to today's analysis. Have you ever wanted to trade Bitcoin but haven't dared try?

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12:14An extended version of that conversation, which includes Julian's thoughts, by the way, on the dollar, China, we covered a lot, is on our platform, as are those macro insiders with Raoul. If you're not already a member, scan the QR code and you can join our community. By the way, I should have said this yesterday. Julian's mic is so trash. We know that. Everybody knows that. He was traveling, for those of you who are paying attention. so he didn't have the one we already sent him, but we clearly have to send him another one to use when he's on the road. Although my secret theory is that he does it just to torture Rao.

12:46I don't know. I could be wrong. But anyway, we know. We feel your pain, people who complained about it. Dave, so what do you make of that? I mean, do you see the risk of a stock meltdown? I'll put it in the words of actually George on the chat, who's just mentioning this. Okay, two rate hikes, than the breakdown in September, in my honest opinion? You know, the fear that maybe like the Fed's just going to now have to go back to being so aggressive they break something. OK, so I would actually argue the Fed has already broke certain things. Every interest rate hiking cycle, the Fed breaks something.

13:22We could point to the UK pension plans. That's a distant memory. We can point to Silicon Valley Bank and the others. That seemingly is a distant memory. You know, we had some of the largest banking failures ever in the history of mankind. And equity markets are up. Obviously, a little bit of concentration happening there with big cap tech really driving markets higher there. But still, the sentiment that and we could argue is not going to get ahead of itself from a FOMO standpoint. I actually think we could end up getting there. But I don't really view that we're going to have this massive at some point meltdown.

14:00What I would actually expect to see happen is these hikes come into place. At some point, investors realize, have I now started to pay up too much for lower and lower earnings? But what's going to be fascinating is they get Nvidia. Nvidia was arguably trading at extremely rich multiples. Then they say that they have absolutely blow out revenue. Like real, real numbers. That's not a forecast. It actually occurred. And so that to me shows that for the time being, the bulls are back in charge. Now, I believe that we're going to see a bit of a kind of a summer swoon as we're starting to see. Like this is I think some of this equity market days that we've seen recently are likely going to play out.

14:51But part of me says, and if we look at just the amount of money that's floating into money market funds, people, when they come back from the beach or come back from vacations, actually might melt the market up higher before we get something inevitable. Why is that? Well, I think, look, we have, for the first time, cash is an asset class. For most of my investment career and most of many people, it has not been. But we, you know, I remember when I when I first started, you know, in the early 2000s, cash was an asset class, learned about capital asset pricing model and all that, all that stuff.

15:31That was ignored post the global financial crisis. It was a waste of time because you weren't going to earn anything and you were forced to go buy bonds. If you were a bond investor, you had to go buy credit. Credit investor had to go buy equities. Equities had to go buy alts. And we know we know what happened there. In 2022, that's when we had the repricing, right? Markets are moving at a faster and faster pace than they ever have today. And I think what happened for stocks is investors bid up or sorry, bid down the fact that we're going to have all these rate hikes. This year, it's been a bit of a recalibration saying, hey, maybe the economy is not so bad.

16:11But I think what's going to happen is people are going to move out of cash and perhaps bid up stocks pretty aggressively because they have this fear of missing out. And after that, when the reality sets in that, hey, multiples have already risen significantly. We're not there yet, in my opinion. Multiples have risen. Earnings don't look incredibly hot. The Fed's not cutting. they may actually be forced to be on pause for a long time that's when i think we get a reassessment but to me that's that's kind of six months from now now of course anything can happen there could be an exogenous event but i'm not quite into september i actually think september could see a bit up and then uh coming come the winter is when a realization happens how what's actually happening with the economy and to your other point then you can no longer make these examples about year over year COVID excuses, that's in the rear view mirror.

17:07Yeah, so maybe a cleaner read. That would be interesting because it would be kind of the counter, the seasonals people, people expect horrible Octobers and they expect a rally at the year end as everybody tries to get their winners on their books. So when you, the way you just described it, I'm interested in that FOMO because you definitely, people who are not in NVIDIA are definitely pissed they're in NVIDIA. And even some people were in it and sold too early are mad that they sold too early. So do you feel like the FOMO is just around some of these really high momentum tech stocks? Or is it just that people have been in cash?

17:45And if you see a pullback, they'll see that as an opportunity to put money to work. To me, it's more that broader point that I don't, I think there's a realization, right? The beauty of today's world is that, one, conversations like this can happen more frequently. We're not reliant. We take it for granted that all significant amount of financial data is at our fingertips all the time. And that's why one of the reasons why I think market cycles have been compressed, they're shorter, they hit harder, and then people move on because our attention spans are shorter than a goldfish, especially even when it comes to our financial assets.

18:24And what to me that means is that people are going to say, hey, I did pretty well in cash. I have a better feel of where inflation is. And even though cash may start out yielding inflation on a real basis, they're going to say, you know what? I don't want that 1 % real return. I want that. I want to get the 10%. I want to get the 15%. Yeah. So basically, it's a sort of bias towards stocks. Yeah. And I still think we're there, right? I don't, I think we're not, this year in particular has had me sort of recalibrate my expectations of people react to data, right? The data is, again, in some cases, jobs aside, maybe services aside, if you look at manufacturing new orders in the U.S.

19:13globally, if you look at other sort of leading indicators, the bond market itself, it's not the yield term, right? it's telling us we should be bearish. But the sort of sentiment that still exists, maybe the cult of equities that happened when retail traders came back into the market during COVID is not gone. It's just sort of maybe morphed into different areas, right? So no longer meme stocks per se, but it's give me a basket of securities that have that kind of quality bias, that ability to potentially outperform in a variety of different market environments that they plowed into this year. But I do think that can broaden out over the coming months as people, as that FOMO perhaps takes over.

20:02Yeah, so interesting. So many, many of your, I want to talk a little bit about sectors. So many of your ETFs, Round Hills ETFs, are in the tech space, including generative AI and technology ETF, ticker CHAT, CHAT. Huge amount of momentum here. I mean, ridiculous, but also concerns about valuations, right? We saw NVIDIA up just as some of the top holdings within this because it just launched, so it doesn't match up year to, you know, I think, right? I don't even think it's trading year to date. Yeah. So, but NVIDIA up 193%. I mean, that's just ridiculous. You know, this is where all of the momentum has been.

20:44How are you feeling about this sector? You mentioned the fact that NVIDIA had those earnings. Do you feel like there is real capex being spent here and real money that's going to translate into earnings beats? Or is there concern that not everybody's going to be a winner and there's some noise? How are you guys looking at this? So I'll start with the second kind of part of your question first. So one of our main theses or my main thesis is heading into this year was that we are in a have and have nots economy. We see that play out, unfortunately, sort of with the world itself, with sort of the wealthier getting wealthier and, in fact, the poor getting poorer.

21:21Same thing's happening with corporations. This year, the haves have been mega cap tech who have earnings, who have firepower, who have strong balance sheets, cash on hand. The have-nots have been your non-profitable tech, where all the interest was before. The same thing, I think, is sort of happening with generative AI. We are in a world where there are companies that are the halves. In the semi-space, it's NVIDIA with a huge moat around their GPUs. To some extent, AMD is participating and a handful of others. And so, yeah, while the valuations in NVIDIA are by no means, I think, cheap, they have much better fundamentals than a Cisco did in the late 1990s.

22:05So to me, I think it's premature to be making a comparison of AI stocks being in a bubble. Yeah, the performance is wild for stocks like Meta, NVIDIA, others. But their valuations are not at extremes yet. That obviously can change. And perhaps if we see another run up after this earnings season, the data will change. But for the time being, on a comparison basis, whether we look at one year returns, three year, five year, or particularly the valuation multiples, we're not there yet, even though it kind of feels like we should be. So to me, I think it's easy to point the finger at stocks that are up so high.

22:46But AI isn't just about NVIDIA. I think they're the poster, you know, the place first that most people are looking. But our portfolio in particular is actively managed for a reason, because we want to be able to peel back that onion. We're going to have exposure to companies that are benefiting from that, like your NVIDIAs and Alphabet and others, but also smaller names that people may not be as familiar with. SenseTime, iFlyTech. These are companies based in China that are actually building the large language models that are needed in chat box and the like. And so to us is as people begin to actually do some research, the potential for AI broadens out and people are going to say, hey, it's not just only in a video story.

23:31Yeah. Yeah. That's interesting. And so, Mike, as you were saying that, I was thinking about that the narrative was that a higher interest rate environment is bad for tech. But you're sort of making the distinction that these mega cap tech names are not future profit names. They are delivering on earnings and may be less vulnerable to that environment. Then add the global component in and even more so. Is that how you see it? Yeah, 100%. So I actually am like I've become more bearish on non-profitable tech and companies without profits, right, where all of their focus is on the future. Right. All of our earn it.

24:13You have to believe that you're going to hold your nose and buy whatever multiple they're trading at because they're going to change the world. We know VC has pulled back from that. Public equities have pulled back from that. But that means that the money that wants to get put to work has moved into things that are more sure from a revenue standpoint. Historically, a lot of people, at least how I was trained, that would tell you to go to cyclicals, go to companies like utilities, go to industrials that have these kind of more consistent revenue streams. But what's become fascinating is in the 21st century, those industrials are Apple, Amazon, Microsoft, Alphabet, maybe with a handful of others, and maybe even some semiconductor names because you can't exist in this world without semiconductors.

25:06So to me, I think the kind of classic idea of what is a pro-cyclical company maybe has changed. And to me, it's almost more about who can deliver profits and who with greater certainty versus who may not be able to do so. That sounds like that naturally is going to push you up the food chain in terms of market cap, no? Big time. So that to me is an area where I have wanted to maybe personally dabble in small caps or be from a firm perspective, be more bullish there. But it's been hard to do that because I think until until we see a sea change from from the Fed, which I don't see happening, other than maybe some episodic returns to small caps or even mid caps.

25:51I think it's going to be a winner-take-all world where we are from a market standpoint. So Paul, in our chat, is very fixated on this question because he asked it before, but he wants to keep asking it. The heavy concentration into a limited number of high-flying, high-multiple stocks now looks very similar to the nifty-fifty era, where returns were negative the following decade. Do you worry that could repeat? It sounds like you don't. I think the difference for me is on the fundamentals, that these companies are generating real earnings. They have revenue. They have moats. But weren't they also in the nifty 50?

26:31To some extent. From a bigger picture standpoint, I do believe that we could be in for a period of significantly lower returns out of risky assets. But I also think for the time being, because of where investor sentiment and psyche is, it's kind of premature to totally hunker down. And what I actually, my thesis is that we'll see this run up. And just many people said, well, this happened before with unprofitable tech. we might see the real like something we're not prepared for an actual real melt up and then something crazy happens an exogenous event or the fed needs to kind of change their tune not bail us out we are so accustomed to being bailed out by oh yeah they made it pretty clear they want to break that psychology and what's going to happen is you know again there's no ability to kind of put in i mean maybe someone who has a better models than i have to put a duration around that like again a lot of this is timing right so to me like short very short term i am bearish bearish to neutral over the summer on equities in general as i noted sort of in the kind of intermediate term i'm more bullish but to me that's going to make me as that if that comes true and that real run-up happens that's going to make me more more bearish excuse me over the longer term.

28:09So Paul's thesis may actually be right. But that's a decade trade, right? And even in a decade, you can see a lot of variability. And I think you just said before, and this has come up a lot too, and Paul, this is something to consider, is that if we didn't have the access to information, we didn't have the participation, you didn't have things like Real Vision when the nifty 50 happened. So those negative returns for a decade, if everything's compressed, one wonders if it would really last a decade. We saw it happen with Silicon Valley Bank. You have a bank run in five minutes. So it's sort of an interesting thing about investor psychology right now that we also don't really understand.